DOUBLE TAXATION RELIEF

HC Deb 19 July 2000 vol 354 cc439-64

Dawn Primarolo

I beg to move amendment No. 103, in page 513, line 11, at end insert—

'Restriction of relief for underlying tax

7A.—(1) Amend section 799 of the Taxes Act 1988 (computation of underlying tax) as follows.

(2) In subsection (1) (underlying tax to be taken into account to be so much of the foreign tax on the relevant profits as is attributable to the proportion represented by the dividend) after "as" insert "(a)" and at the end of the subsection add ", and (b) does not exceed the amount calculated by applying the formula set out in subsection (1A) below.

(3) After subsection (1) insert"— (1A) The formula is—

D x M/(100 - M)

where—

• D is the amount of the dividend; and
• M is the maximum relievable rate;

and for the purposes of this subsection the maximum relievable rate is the rate of corporation tax in force when the dividend was paid."

(4) In subsection (3) (profits by reference to which underlying tax to be taken into account is calculated)—

1. (a) at the end of paragraph (a) insert "and";
2. (b) omit paragraph (b); and
3. (c) in paragraph (c), for "paid neither for a specified period nor out of specified profits" substitute "not paid for a specified period".

(5) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom unless the dividend was paid before that date.

(6) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.

Mr. Deputy Speaker

With this it will be convenient to discuss Government amendments Nos. 104 to 107.

Dawn Primarolo

I have not moved the amendment formally because it is necessary to comment on the double taxation relief issues before the House. I recognise that the hon. Member for West Dorset (Mr. Letwin) is not feeling as well as he might. I therefore hope to be succinct in my comments and, at this point, perhaps he will agree with our proposition.

The amendments will change the system of double taxation relief for companies in order to reinforce the Government's policy of removing the tax advantages that the biggest multinationals get from using offshore companies to route dividends into the United Kingdom. At the moment, that enables them to avoid UK tax on profits on which little or no tax has been paid elsewhere, and to avoid the impact of the legislation on controlled foreign companies—a matter that we will come to subsequently.

Most of the provisions introduced by the amendments are new. Some, however, are a reordering of amendments that were agreed in Standing Committee; they need to be repeated because of the other changes that we are making. I turn specifically to the new proposition in the Government amendments, which basically deals with onshore mixing. That brings me to new sections 806A to 806K. I shall mention briefly what they do.

The Inland Revenue has produced a very detailed explanatory note with dozens of worked examples. To make this aspect of very complex legislation as clear as we possibly could, the Government thought that it would be helpful to have a full explanatory note for business and, indeed, hon. Members to refer to. The Inland Revenue will publish further detailed guidance about the legislation later this year, well in advance of when the legislation starts to apply at the end of March next year.

New sections 806A to 806G allow underlying tax that is excluded by the 30 per cent. mixer cap, or that cannot otherwise be allowed in the UK, nevertheless to qualify for credit relief, subject to an upper maximum limit of 45 per cent. That will effectively prevent low-taxed profits from being mixed with high-taxed profits, while still allowing relief for foreign tax paid at rates of up to half as much again as the UK rate.

A rate of 45 per cent. is generally above the main corporate tax rates in, for example, virtually all the European Union, the United States and a very large number of other countries, which I am more than happy to read into the record if hon. Members wish. However, I do not think that they would wish me to do that, so I will use just those examples.

The proposals would remove the tax advantages of holding overseas subsidiaries through offshore holding companies. They prevent avoidance of UK tax on low-taxed profits from controlled foreign companies by the current practice of mixing them with high-taxed profits earned by different companies in different countries. They stop the UK giving unlimited relief for foreign tax paid at rates well in excess of the UK rate, while nevertheless giving companies scope for obtaining relief for foreign tax paid at rates that are up to half as much again as the UK corporate tax rate. They introduce more flexible forms of relief than UK companies have enjoyed before.

The old system of mixing offshore was extremely complex. Dividends had to be timed perfectly. One had to have the right dividend in the right place at the right time in the right year in the right amount. The mixer system was very complicated and entirely artificial. We are putting in place a system whereby new companies investing overseas will in future have a new system that is simpler and more flexible, although taxation in this area is never simple; however, it will be simpler. It will influence behaviour.

Some companies already investing overseas have complicated structures. If they want the maximum benefit from the arrangements, they will need to restructure. In the Financial Times today, the Chartered Institute of Taxation said that the compromise was "generous and flexible". Hallelujah! Peter Cussons, partner of PricewaterhouseCoopers, said of the proposals, "90 per cent. there, " although he would have liked to have seen the cap set a little higher, but he would say that, wouldn't he?

I think the House will agree that the arrangements that will be in place following all the changes in the Finance Bill on double taxation relief, on capping and to prevent offshore mixing, and the arrangements for onshore mixing give a sound basis to move forward in this policy area. I commend the amendments to the House.

Mr. Letwin

It seems as long as I have been alive since we started making representations about the matter. Hon. Members present will remember that the initial proposals by the Government followed a consultation paper in which two options were put forward, one of which was onshore pooling. From that moment to this, we have argued that onshore pooling was an appropriate response. I can only say with heartfelt thanks that the Paymaster General and her colleagues have now given us a system of onshore pooling. We could all have been spared a lot of time and bother had that been done in the first instance.

This is very good news for British industry, for parliamentary democracy and for those who are contemplating establishing headquarters of multinational companies in the UK. Indeed, I will go so far as to say that I think the system of onshore pooling is superior in principle to the system of mixer companies, which has informally and quasi-formally operated to date. It is very good news. Indeed, it overwhelms the points that I am about to make, although they are also important. I hope that the Paymaster General will take them in the spirit in which they are intended—not as party politics, but as a recommendation for serious action over the next year.

if I can be forgiven a Dickensian allusion, the drafting of these particular amendments, which I recognise has been done in an almighty rush given the complexity of the subject matter, is worthy of the Circumlocution Office and may on reflection engender a certain amount of Jarndyce v. Jarndyce legal action. I hope that the Paymaster General will allow the next few months to be taken up in part by a review of those provisions to see whether a certain element of the spirit of the tax rewrite might not enter some of them, and whether they might not be brought back, not substantively altered necessarily—except in relation to a point that I shall come to—but altered in the drafting, so that there is some hope of people who have to operate the system in future years roughly understanding them.

Many hours spent going through the provisions in the past few days with expert help have convinced me that it is almost impossible to understand quite large sections. One or two of the most distinguished accountants in Britain are unable to determine the precise meaning of some of the paragraphs. Perhaps the parliamentary counsel who wrote them is unable to determine their meaning. In any case, I am sure that they could be improved upon with the lapse of time.

We are grateful for the offer that the Paymaster General makes to produce a kind of guide for the uninformed in due course. I hope that that guide, which will have the benefit again of a much greater amount of time than the notes on clauses have had, will benefit from a little application of Fowler's plain English—not just plain English, but conceptual clarity.

I do not mean to be abrasive about the people who had the laborious task of drafting the notes on clauses, at what must have been astonishingly high speed. The notes are voluminous, but I must say that they are an extraordinary example of the art form. They make issues that were already complex obscure, and in some cases, issues that were already obscure incomprehensible. In some cases, it was only by returning to the clauses themselves that I could make out what was going on. The problem is remediable. There are plenty of people in the Treasury and at the Paymaster General's disposal who know how to do such things, given a few more weeks. I hope that time will be taken and that when the guide is produced, it will be comprehensible. So far, we are probably ad idem on the matter on both sides of the House.

7.30 pm

I shall deal with one grave matter of substance, but, before that with one comparatively minor matter. First, I must declare an interest. I have never been able to work out what it was, but I am sure that I do have an interest in some way, and it would be remiss of me not to declare it.

The Paymaster General said—and she was right—that the preponderance of the relevant other jurisdictions have tax rates that fall within the 45 per cent. limit. However, the current drafting of the amendments will, rightly, also capture withholding tax. The hon. Lady will discover, or she may already know, that in relation to, for example, subsidiaries held in Tokyo or in the state of New York, the composite effect of underlying tax and withholding tax rates will exceed 45 per cent.—not by very much, but by a little. That is why, I think, Mr. Cussons was arguing for a slightly higher rate. I believe that 48 per cent., for example, would capture almost all the effects to which I am referring, and certainly 50 per cent. would.

I do not want to stress that point unduly. Throughout the debate, I have never sought to use hyperbole where there are serious arguments and serious issues at stake. The old system that was introduced by the previous version of the Bill would have destroyed Britain as a location for multinational headquarters. The difference between 48 and 45 per cent. as a cap on onshore pooling will not destroy—I repeat, will not destroy—Britain as a headquarters for multinationals. It is, however, a minor irritant and I hope that the Paymaster General will reflect on that. There is time enough between now and next March or April to revise the limit to 48 per cent. That would be helpful, without much cost to the Treasury.

My major point relates to a matter which the Paymaster General acknowledged, to a degree, but I am not sure whether she has yet, or even that we have yet, fully grasped the scale of the problem. I refer not to new companies that are considering locating their headquarters in the UK, but to multinational companies that are already headquartered in the UK.

Those multinationals are largely shackled by the provisions that ensure that there will be a significant crystallisation of capital gains, should they seek to leave the UK. It has never been our argument that any change of double tax relief will send packing companies that are already headquartered in the UK, for that very reason—they are shackled by the provisions of capital gains realisation.

I am not saying that the effects that I am about to describe will send companies packing, but those effects may cost companies currently headquartered in the UK very large sums of money. That is the worry. Currently headquartered in the UK are multinational companies which, for tax-mixing purposes or for other purposes, or both, have been structured around intermediate holding companies, very often Dutch BVs, but in some cases other kinds of mixer companies. They have indirect subsidiaries—subsidiaries of subsidiaries—often in countries such as Japan and the United States.

The great bulk of the most important subsidiaries of multinationals headquartered in the UK, both originally UK-based and immigrants to the UK, have holdings through intermediates and sub-subsidiaries in the US and Canada. For various cultural and business reasons, our major area of outward investment has been north America. Under the provisions for onshore pooling, in order to benefit fully from the mixing or pooling—in order to get the unrelieved portion dealt with and to be able to use it—those companies will have to restructure their activities in such a way as to bring the current sub-subsidiaries and sub-sub-subsidiaries under the direct ownership of a UK-based company. That is the point of onshore pooling. We have no objection to that. There are restructuring costs associated with that. but I do not dwell on them—I suspect that, in the context of those companies, those costs will not be major.

However, the UK is not alone in having rules that crystallise capital gains upon restructuring. Other countries do, too. Some of the jurisdictions in the US have very great penalties on restructuring under certain circumstances. The Paymaster General is helpfully nodding, so the subject has evidently been aired inside the Treasury. I have had the opportunity in the past few days to discuss the matter with some distinguished auditors and also with some of the most important company treasurers in multinationals headquartered in the UK, which have not just substantial but enormous sub-subsidiaries and sub-sub-subsidiaries in north America.

I can assure the Paymaster General that a proper investigation of the matter will in due course reveal that the possible losses to multinationals headquartered in the UK associated with the transitional restructuring, so to speak, required to get the benefit of the onshore pooling may be enormous.

Bizarrely, that takes us back to a slightly sterile debate that we had right at the beginning, long before I at least, and perhaps even Ministers, properly understood what we were debating. That was the sterile debate about how much the Treasury would or would not raise by moving from mixing to no mixing. It was a sterile debate then as, in fact, the Treasury would not raise anything because sooner or later companies would not come to the UK. The long-term effect of the old proposals would have been that no revenue was raised and no multinationals were headquartered in this country.

Now there is the question not of new companies coming, but of existing companies that are shackled in the UK. There is the possibility not of the Treasury doing too well, as it will not gain by the restructuring, but of the US Treasury gaining from the provisions. I know that throughout the proceedings in Committee and on Report, the Paymaster General has been generous and I do not doubt her generous instincts, but I suspect that they do not stretch to trying to make the US Treasury richer at the expense of UK-headquartered multinationals.

A brief inspection of The Economist this week will show that the US Treasury is rich beyond the wildest dreams of man. It is getting to the point where presidential candidates vie with one another to explain to US taxpayers how much tax relief they will undertake. We do not need to shed tears about the US Treasury, and we do not need to make it any richer at the expense of multinationals headquartered in the UK.

The practical question arises: how serious is the problem? The honest answer is that I do not know, and there is no one else who knows, as we have had only a few days to study the amendments. It will take time for accountants and treasurers in those large companies to get to grips with what will be required and to work out in detail what the costs will be.

What are the practical steps that can be taken if it transpires that the problem is serious, as I suspect it may be? I think that I can suggest a course of action that may be acceptable to the Paymaster General and which she would have an opportunity to put on the record today. We could then rest easy, broadly, and, in the spirit of amity, claim joint victory over the forces of evil. I do not suggest in any way that that would be a victory over the Government—no, no, far be it from me.

I suggest that over the next few months, companies be given the opportunity to calculate the tax costs arising in other jurisdictions; that some consultative process be established so that they can bring to the attention of the UK Treasury on a confidential basis the broad effects; and that the Paymaster General and her colleagues should consider those and judge whether the effects are serious. If they are, the Paymaster General or her successor should bring forward in next year's Finance Bill—that will be just in time—transitional amending provisions to provide more time or to make such other changes as are necessary to allow multinational companies currently headquartered here not to suffer the effects that we are discussing, or not to suffer them too dramatically.

I say "just in time" because, as the Paymaster General rightly said, the provisions will come into force next March. Unless my colleagues or successors are peculiarly inadvertent, next year's Finance Bill will not have been taken through the House and passed into law by March.

If the hon. Lady were now to announce that she is at least willing to go through some such process, and to agree that if it transpires that there is modification required she will bring forward in next year's Finance Bill retrospective legislation to allow for that, companies could proceed in the next few months in the knowledge that if they can show that there is a real problem, action will be taken retrospectively to allow them to engage in restructuring at a pace and in a way which minimises that problem.

Mr. Edward Davey

The hon. Gentleman is making an important point. One way to assist companies as they plan for the next financial year would be if the Government were, in a pre-Budget report, to pre-announce at that early stage their intention to allow retrospective taxation and the possible shape of it.

Mr. Letwin

Yes. I think the hon. Gentleman's suggestion is an improvement on mine. I agree that it would be helpful if these matters were made clear in a pre-Budget report. I am sure that there will be time enough to do that. If there really is a problem, the scale of it will then have become clear.

I do not ask the Paymaster General to make a firm commitment on Report to a particular series of steps. However, if she will agree to reflect on these matters and to work out a scheme of action that will ensure that there are not unnecessary, significant and crippling costs—crippling is perhaps an exaggeration—for multinational companies currently headquartered in the UK, we shall have achieved a reasonable solution. This is a textbook case of why it is worth while going through the rather ghastly and laborious process of Second Reading, Committee and Report—it has given the industry and the professionals time to bring out the real problem.

I give due credit to the Paymaster General because she has shown considerable forbearance and understanding as we have gone through the parliamentary process. In the end, she has produced a sensible and workmanlike solution. She will not go down in history as the sort of Agrippa that we feared. On the contrary, she will be recognised as the kindly aunt of British industry.

Mr. Barry Gardiner (Brent, North)

We have come a long way over the past few months, and the amendments reflect that. I pay a sincere tribute to the work of the hon. Member for West Dorset (Mr. Letwin), who, in a powerful speech at the beginning of our consideration of these matters on the Floor of the House, drew attention to the problems that stemmed from the original drafting. He did his cause nothing but good by the way in which he argued rationally and reasonably throughout consideration in Committee, not taking the line of party political advantage. I have been impressed by that, and I pay him tribute for adopting that approach.

I pay tribute also to my hon. Friend the Paymaster General for the way in which she has consistently responded to, and taken on board, the points that have been made. With the amendments, we shall end up with much improved legislation. As the hon. Member for West Dorset said, that is a tribute to the parliamentary process of Second Reading, Committee and Report.

7.45 pm

In Committee, I recall the Paymaster General making some fine points about the way in which changes to double taxation must be considered, together with all the other elements of the tax system. We must take account of that. I say in response to the comments of the hon. Member for West Dorset about US Treasury gain that business has repeatedly pointed out that there is extreme reluctance to take on board aspects of the US taxation system in this country. Relief for interest is restricted, capital gains are taxable and double taxation relief is extremely complicated in the US. On that basis, I do not think that the amendments will he the windfall for the US Treasury that the hon. Gentleman might have led us to believe.

We have ended up with 16 pages of highly complex legislation, and, at short notice, we have had to come to terms with how that will impact on industry. There is still the opportunity for pause for further reflection. When we consider the revised figure of 45 per cent., it seems that companies using overseas holding companies to hold trading companies in higher tax countries are penalised. An example would be if a German subsidiary were held below a holding company. A capped rate of 30 per cent. would apply to double taxation relief. That is the UK corporation tax rate. If the subsidiary company were held directly, the cap is 45 per cent., and can therefore be pooled against more lowly taxed profits. There are areas that need further consideration. There can be commercial reasons for holding companies other than simply tax reasons. These will restrict the ability to mix and pool dividends when shares are held under a holding company.

A UK company using an EU holding company is now worse off than if foreign trading companies were held directly in some situations. I question whether that is in line with the free movement of capital that is demanded within the EU. However, the movement that we have seen over the past few months has been enormous. We have ended up with much better legislation than would have been the result had we proceeded on the basis on which we started. I pay tribute to my hon. Friend the Paymaster General for the work of her team and for her willingness to listen to all the arguments that have been presented to her.

Mr. Letwin

What the hon. Gentleman says is true. However, I hope that I shall not be accused of disloyalty to my right hon. and hon. Friends if I defend the Paymaster General against the hon. Gentleman's accusation. It is an inherent part of the logic of onshore pooling that the holding should be direct for the unrelieved portion to be mixable. It is almost necessary that there should be strict compulsion that all the mixing should be done onshore for the regime to be clear. I accept the hon. Gentleman's point that that will mean that the subsidiaries of trading subsidiaries, rather than controlled foreign companies, will also be caught. I accept also his point about the effects in Germany, for example. However, that is an inherent part of the logic and we must accept that consequence, whereas the restructuring that I was talking about is transient.

Mr. Gardiner

I accept those points. Where we have ended up may have certain consequences that are disadvantageous but, on balance, we have a package that is a huge improvement on the original drafting, and one that should be welcomed by the House.

Mr. Edward Davey

If only, on the odd occasion, Prime Minister's Question Time could be as consensual as this debate. It has been quite amazing. There has been a great deal of agreement between both sides, and that is welcome. I associate myself and the Liberal Democrats with the comments of the hon. Members for West Dorset (Mr. Letwin) and for Brent, North (Mr. Gardiner). The way in which this debate has been conducted has shown how Parliament, when it is at its best, can help to defend British industry and the interests of our country.

It is not often that I say that about the way in which the House scrutinises financial matters. On many other occasions, I have criticised the way in which it has dealt with expenditure, and the way in which it deals with tax matters is not often to be praised. We often consider new clauses and amendments late in the day and do not have sufficient time to debate them. One could apply that criticism to some measures in the Bill, but the Government have consulted recently and that has assisted us in our work. I add my support to the call of the hon. Member for West Dorset that the Government continue with that consultative process as we wait to see how these complex measures work in practice. If the Paymaster General can assure us that they will deal with the issue in the pre-Budget report and that they will at least consider the need for possible retrospective legislative change, that will be incredibly helpful.

One could, at this point, make several party political points about the whole process and say that lessons need to be learned. However, those lessons probably have been learned—I certainly hope so. It would be a wise idea for Ministers to listen to their officials and not just to their political advisers. If officials had been in charge of drawing up the Bill, we would not have faced the problems of the past few months. We would have had better legislation if the proposal that we are now examining had been introduced in a more considered fashion. The hon. Gentleman is probably right to say that onshore pooling is probably superior to the old offshore regime, but it would have been better if such a move had been made after substantial consultation and had not been rushed through in a short time.

I wish to reflect on one or two details that give rise to slight cause for concern. The first appears in Government amendment No. 106 and in the proposed new section 806H to the Taxes Act 1988 which is headed "Surrender of relievable tax by one company in a group". The arrangements for group provisions for other areas of taxation are often made by primary legislation, but the proposed new section 806H suggests that that should be done by regulation in this case. That is unusual. Perhaps when the parliamentary draftsmen were trying to put such detailed legislation together, they felt that they had no other alternative. One can have sympathy for that view. However, it is not necessarily a good precedent and it is not how group relief is dealt with for other taxation purposes.

I associate myself with a point made about how the cap relates to subsidiaries in Tokyo. That issue is a cause for concern. The current proposal relates to both the cap and to the underlying withholding tax. Perhaps it should be reconsidered at a later stage.

A separate point on the relief of capital gains on the sale of shareholdings has been brought to my attention. It may relate to the point that the hon. Gentleman made about the United States tax regime, but my point applies to Dutch mixer companies. It is my understanding that, when a subsidiary held via a Dutch mixer is sold, there is no UK tax on that gain. Is the Paymaster General concerned that, when a UK onshore mixer company sells a subsidiary, it will face a capital gains tax liability that would not exist if a Dutch mixer company is closed and moves onshore as the result of restructuring? I am not sure whether that is so, but I would be grateful if the Government could reassure me on that point.

Mr. Letwin

I am sorry to return the hon. Gentleman to his point about the proposed new section 806H. On re-examining it, I do not understand his argument. It seems appropriate that the surrender by one group to another of the relievable tax should be organised by regulation. Is he suggesting that there should be a statutory provision describing exactly how that should be done?

Mr. Davey

My point was that group relief in other areas of the tax system and tax legislation tends to be provided for by primary legislation. Therefore, there is no parallel with this provision. I wanted the Government to explain their thinking. Because this proposal was made in a hurry, I can understand why it will be made through regulation, but I hope that it does not set a precedent. One normally wants group taxation to be provided for by primary legislation.

Mr. Letwin

In that case, I agree with the hon. Gentleman. In due course, the proposal should be put into statute. However, can he and I not agree that it would be better to assess experience and to understand what the rules should be before we enact the measure? It is right that there should be some rules, but they need to be in regulations at the outset. However, we hope—next year or the year after—to put them into statute.

Mr. Davey

I am more than happy to concede that point.

Dawn Primarolo

I intend to follow in the spirit of agreement that has broken out. If the hon. Gentleman reads the provisions of the proposed new section 806H(3), he will see that the regulations made under 806H(1) may make different provision for different cases … may contain such supplementary, incidental, consequential or transitional provision as the Board may think fit. Given the complexity of the issue, it is appropriate to put such measures into regulations that we will have an opportunity to discuss. That does not set precedent. The House has used regulations in that way for some time. Given the complexity of the points made by all the contributors to the debate, and what the hon. Gentleman has said in the past about consultation, that is the most sensible way to proceed.

Mr. Davey

I did not wish to make this a major issue. I was merely trying to make sure that the Government realise that they have approached group relief arrangements differently from the way in which they have dealt with other tax legislation. I understand that there are special circumstances and I am sure that the Government are right to wish to consult on the detail. That is why I shall certainly not vote against the amendment.

I return to the point that I may not have been making terribly well. I mentioned Dutch mixer companies and capital gains tax liabilities on the sale of subsidiaries. If such companies move onshore into UK mixer companies, will the Government introduce measures for CGT relief on the sales of the overseas subsidiaries of the UK-based onshore mixer companies? It is possible that I have not understood the point properly, but I would be grateful if the Minister could try to explain it to me.

Dawn Primarolo

The hon. Gentleman may be struggling with the concept of a mixer company. It is simply a vehicle and its location is determined by where its board meets and by the nationality of those on the board. Its sole function is to funnel profits to the UK having mixed them offshore. He is making a point about mixer companies that does not apply because the provisions relate to payments that come directly to the UK.

8 pm

Mr. Davey

The Paymaster General may be right, but I have been led to believe that some mixer companies have subsidiaries; Dutch mixer companies have had subsidiaries. The way in which those companies are constructed is often complicated. The complexity is not necessarily driven by tax reasons. I should be grateful if the Paymaster General reflected on that when she replied to the debate.

Does the Paymaster General have a forecast or estimate of the expected yield of the proposals? We heard a range of forecasts for the expected yield of the original proposals. The Government have spent much time on the matter, and I wonder whether the Paymaster General could tell the House the expected revenue yield, or whether no Exchequer gain is expected from the proposals.

When the Government propose major changes to the tax system in future Finance Bills, I hope that they will have learned lessons from this year and that they will abide by their code on consultation. If they do that, we will not again get into the current mess over double taxation relief.

Dawn Primarolo

I shall reply briefly to the points that were made by the hon. Member for West Dorset (Mr. Letwin), my hon. Friend the Member for Brent, North (Mr. Gardiner) and the hon. Member for Kingston and Surbiton (Mr. Davey). I am sure that hon. Members who have spoken will agree that it is especially important that none of my comments add uncertainty to an extremely complex aspect of taxation. They will therefore forgive me if I do not respond as fully as they would like to some of their points.

We are considering large companies making decisions about their structure and about their best interests in maximising the benefits that are available in, for example, the new arrangements for onshore pooling. I shall therefore be careful about what I say on that.

The hon. Member for West Dorset mentioned drafting. I hope that it will be possible to clear up several points in the guidance so that, for now, at least the guidance will be clearly understood by the Revenue and the relevant companies. The hon. Gentleman also mentioned withholding tax. I have considered the point that he made and I examined the January 2000 KPMG corporate tax survey. It considers corporate tax rates and withholding, if it exists. I am not surprised that the hon. Gentleman picked the one place where the combination of withholding and corporate tax might create a higher level than the 45 per cent.

Mr. Letwin

I mentioned two places: Tokyo and New York. I feel more confident that I am right about New York than about Tokyo. However, will the Paymaster General admit that New York is not any old place? It is where the largest number of major subsidiaries of UK-based multinationals are located. The point that I made is therefore of some importance.

Dawn Primarolo

I would not want to insinuate that Tokyo or New York were "any old place"—heaven forbid! The 45 per cent. rate is extremely generous. While the difference that may arise is not insignificant to companies, it is only just above the cap. In fairness to the hon. Gentleman, and to provide certainty about the matter, the answer to his direct question about whether I would review the 45 per cent. rate is no.

The hon. Member for West Dorset also mentioned company structures. He concentrated on the United States preferred company structure as opposed to that in the United Kingdom; the flat structure that the US operates rather than what could be described as a chain structure. The hon. Gentleman mentioned costs in the US. A company may consider it necessary to move the US company so that it has a completely flat structure, which would relate to the UK, to maximise the benefits. That would entail costs. The relevant company would have to consider the benefits of restructuring its operations. That would be a commercial decision for the company, which would have to balance the costs of restructuring with the benefits that might accrue from it. Companies are already doing that in terms of the acquisitions of US-UK groups. We are considering vast companies. The decisions are always complex and involve vast amounts of money and much consideration.

The hon. Member for West Dorset kept saying, "if there is a real problem". I do not deny that restructuring will involve costs for some companies. I do not believe that that is a real problem in the way in which the hon. Gentleman suggests, although, as with any legislation, the Government have to be watchful about its operation. We have an annual opportunity to consider whether the measure is operating correctly and to remedy it if not. We are considering complex matters, which we will supervise closely.

I am not currently attracted to helping with transitional costs. The benefits to the companies of being linked directly to the UK are enormous. Apart from the 45 per cent., there is the carry-back of three years to offset a liability, indefinite carry-forward and the ability to surrender to another company in the group for use against uncapped lower dividends. Holding those assets directly is greatly beneficial to the company and the UK economy.

Mr. Letwin

I accept that the carry-back and carry-forward provisions, and the relief provisions in general, may be attractive. Will the Paymaster General at least give us an assurance that, if representatives of major multinationals with their headquarters in the UK wish, they will have the opportunity to see her or her senior officials to explain the tax consequences, as the year progresses, in the US, or north America generally, of restructuring so that sub-subsidiaries of current Dutch BVs—limited companies—and other vehicles are brought under the direct ownership of the UK headquarter company? Will she assure us that she will consider those representations seriously and take them into account when drafting next year's Finance Bill?

Mr. Flight

rose—

Dawn Primarolo

I shall deal with the point raised by the hon. Member for West Dorset before giving way to the hon. Member for Arundel and South Downs (Mr. Flight). One at a time, please.

The Government have clearly demonstrated in the development of their policy that they are prepared to hold discussions and listen to the points that companies and many other people want to make about our proposals. There is no reason why that practice should not continue. Indeed, we have met a huge number of representative groups and large companies. The hon. Gentleman asks whether the Treasury and the Inland Revenue will engage in discussions with companies; of course we will, but we should do so anyway.

Mr. Flight

It is perfectly reasonable that British-based multinationals should not have everything all ways round. However, much as I support our alliance with the United States, I would not wish to stimulate a massive gratuitous payment of tax to the United States authorities. It would be better if that tax came to the UK authorities.

Dawn Primarolo

Indeed. As strong as our cultural, historical and business ties with the United States might be, our friendship would not extend to providing income for them. The hon. Gentleman knows a great deal about how complex the matter is, and he will have appreciated my points on providing certainty.

I agree with my hon. Friend the Member for Brent, North about the way in which the debate has been handled. It has been fraught at times for me at the Dispatch Box, but I feel that I have accounted for myself and the Government's policy clearly. We have developed a good policy. My hon. Friend is right to pay tribute to the officials who have supported Ministers in that exercise at the Inland Revenue and the Treasury.

I know that the hon. Member for Kingston and Surbiton does not believe everything he reads in the newspapers, so I can tell him that the scurrilous remarks about a division between political advisers and officials inside the Treasury and the Inland Revenue were not correct. The Treasury, the Inland Revenue, Ministers and special advisers work as a superb team to develop good policy—as we have done in this respect—with assistance from some others en route. I have dealt with the point about regulation and why section 806H of the Taxes Act 1988 deals with that.

The hon. Member for Kingston and Surbiton asked about capital gains tax on mixer companies. There may be a slight misunderstanding about that. The Inland Revenue is currently consulting on the roll-over relief for capital gains on sales of substantial shareholdings. He will have heard me refer to that in Committee. That will include shareholdings in trading companies that would have avoided capital gains in the mixer companies. That is subject to current consultation by the Government, and would cover the point raised by the hon. Gentleman.

Finally, the hon. Gentleman asked about yield. I direct him to the Inland Revenue's press release of 16 June. There have been huge estimates, with great variations, of how much would be raised or lost. I have explained how the Government systematically tried to measure the cost by looking at previous years. The Inland Revenue made it clear that given the scale of avoidance that has come to light since the Budget, the impact of the overall package represented by the changes—including onshore provisions—would be broadly similar to the estimates provided in the "Financial Statement and Budget Report". The hon. Gentleman wondered whether the Government were going to raise tax, but the figures are approximately the same.

I hope, therefore, that I have dealt with all the issues that have been raised. I hope that this closes the chapter on double taxation relief for this Finance Bill.

Amendment agreed to.

Amendments made: No. 104, in page 513, line 35, leave out from beginning to end of line 26 on page 514 and insert—

'Restriction of relief for underlying tax: dividends paid between related

companies

10.—(1) Amend section 801 of the Taxes Act 1988 as follows.

(2) After subsection (2) (cases where the overseas company receives a dividend from a related third company) insert—

"(2A) Section 799(1)(6) applies for the purposes of subsection (2) above only—

1. (a) if the overseas company and the third company are not resident in the same territory; or
2. (b) in such other cases as may be prescribed by regulations made by the Treasury."

(3) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom. unless the dividend was paid before that date.

(4) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.

No. 105, in page 515, line 9, at end insert—

'Separate streaming of dividend so far as representing an ADP

dividend of a CFC

11A.—(1) After section 801B of the Taxes Act 1988 insert— "Separate streaming of dividend so far as representing an ADP dividend of a CFC 801C.—(1) This section applies in any case where—

1. (a) by virtue only of section 748(1)(a), no apportionment under section 747(3) falls to be made as regards an accounting period of a controlled foreign company; and
2. (b) one or more of the dividends paid by the controlled foreign company by virtue of which the condition in paragraph (a) above is satisfied are dividends falling within subsection (2) below.

(2) A dividend falls within this subsection if, for the purposes of Part I of Schedule 25, the whole or any part of it falls to be treated by virtue of paragraph 4 of that Schedule as paid by the controlled foreign company to a United Kingdom resident. (3) If, in a case where this section applies,—

1. (a) an initial dividend is paid to a company resident outside the United Kingdom, and
2. (b) that company, or any other company which is related to it, pays an intermediate dividend which for the purposes of paragraph 4 of Schedule 25 to any extent represents that initial dividend,

subsection (4) below shall have effect in relation to the UK recipient concerned. (4) Where this subsection has effect, it shall be assumed for the purposes of allowing credit relief under this Part to that UK recipient—

1. (a) that, instead of the intermediate dividend, the dividends described in subsection (5) below had been paid and the circumstances had been as described in subsection (6) or (7) below, as the case may be; and
453
2. (b) that any tax paid under the law of any territory in respect of the intermediate dividend, or which is underlying tax in relation to that dividend, had instead fallen to be borne accordingly (taking account of any reduction falling to be made under section 799(2)).

(5) The dividends mentioned in subsection (4)(a) above are—

1. (a) as respects each of the initial dividends which are, for the purposes of paragraph 4 of Schedule 25, to any extent represented by the intermediate dividend, a separate dividend (an "ADP dividend") representing, and of an amount equal to, so much of that initial dividend as is for those purposes represented by the intermediate dividend; and
2. (b) a further separate dividend (a "residual dividend") representing, and of an amount equal to, the remainder (if any) of the intermediate dividend.

(6) As respects each of the ADP dividends, the intermediate company is to be treated as if it were a separate company whose distributable profits are of a constitution corresponding to, and an amount equal to, that of the ADP dividend. (7) As respects the residual dividend (if any), the relevant profits out of which it is to be regarded for the purposes of section 799(1) as paid by the intermediate company are, in consequence of subsection (6) above, to be treated as being of such constitution and amount as remains after excluding accordingly so much of those relevant profits as constitute the whole or any part of the distributable profits out of which the ADP dividends are paid. (8) If, in a case where this section applies, an intermediate company also pays a dividend which is not an intermediate dividend (an "independent dividend") and either—

1. (a) that dividend is paid to a United Kingdom resident, or
2. (b) if it is not so paid, a dividend which to any extent represents it is paid by a company which is related to that company and resident outside the United Kingdom to a United Kingdom resident,

subsection (9) below shall have effect in relation to the United Kingdom resident. (9) Where this subsection has effect, it shall be assumed for the purposes of allowing credit relief under this Part to the United Kingdom resident—

1. (a) that the relevant profits out of which the independent dividend is to be regarded for the purposes of section 799(1) as paid by the intermediate company are, in consequence of subsection (6) above, to be treated as being of such constitution and amount as remains after excluding so much of those relevant profits as constitute the whole or any part of the distributable profits out of which the ADP dividends are paid; and
2. (b) that any tax paid under the law of any territory in respect of the independent dividend, or which is underlying tax in relation to that dividend, had instead fallen to be borne accordingly (taking account of any reduction falling to be made under section 799(2)).

(10) For the purposes of this section—

1. (a) a controlled foreign company is an "ADP controlled foreign company" as respects any of its accounting periods if the condition in paragraph (a) of subsection (1) above is satisfied as respects that accounting period;
2. (b) an "initial dividend" (subject to subsection (14) below) is any of the dividends mentioned in paragraph (b) of subsection (1) above paid by an ADP controlled foreign company; and
3. (c) a "subsequent dividend" is any dividend which, in relation to one or more initial dividends, is the subsequent dividend for the purposes of paragraph 4 of Schedule 25.

(11) In this section— distributable profits" means a company's profits available for distribution, determined in accordance with section 799(6); intermediate company" means any company resident outside the United Kingdom which pays an intermediate dividend: intermediate dividend" means any dividend which is paid by a company resident outside the United Kingdom and which—

1. (a) for the purposes of paragraph 4 of Schedule 25. to any extent represents one or more initial dividends paid by other companies; and
2. (b) either is the subsequent dividend in the case of those initial dividends or is itself to any extent represented for those purposes by a subsequent dividend;

"the UK recipient" means the United Kingdom resident to whom a subsequent dividend is paid. (12) Where—

1. (a) one company pays a dividend ("dividend A") to another company, and
2. (b) that other company, or a company which is related to it, pays a dividend ("dividend B") to another company,

then, for the purposes of this section, dividend B represents dividend A, and dividend A is represented by dividend B, to the extent that dividend B is paid out of profits which are derived, directly or indirectly, from the whole or part of dividend A. (13) Sub-paragraph (2) of paragraph 4 of Schedule 25 (related companies) shall apply for the purposes of this section as it applies for the purposes of that paragraph. (14) Where an intermediate company which is an ADP controlled foreign company pays a dividend—

1. (a) by virtue of which (whether taken alone or with other dividends) the condition in subsection (1)(a) above is satisfied as regards an accounting period of the company, but
2. (b) which also for the purposes of paragraph 4 of Schedule 25 to any extent represents one or more initial dividends paid by other ADP controlled foreign companies,

the dividend shall not be regarded for the purposes of this section as an initial dividend paid by the company, to the extent that it so represents initial dividends paid by other ADP controlled foreign companies. (2) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom, unless the dividend was paid before that date. (3) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.

No. 106, in page 522, line 24, leave out from beginning to end of line 6 on page 527 and insert—

'Foreign dividends: onshore pooling and utilisation of certain

unrelieved foreign tax

19.—(1) After section 806 of the Taxes Act 1988 insert—

"Foreign dividends: onshore pooling and utilisation of eligible unrelieved foreign tax

Eligible unrelieved foreign tax on dividends: introductory

806A.—(1) This section applies where, in any accounting period of a company resident in the United Kingdom, an amount of eligible unrelieved foreign tax arises in respect of a dividend falling within subsection (2) below paid to the company.

(2) The dividends that fall within this subsection are any dividends chargeable under Case V of Schedule D, other than—

1. (a) any dividend which is trading income for the purposes of section 393;
2. (b) any dividend which, in the circumstances described in paragraphs (a) and (b) of subsection (8) of section 393, would by virtue of that subsection fall to be treated as trading income for the purposes of subsection (1) of that section;
3. (c) in a case where section 801A applies, the dividend mentioned in subsection (1)(b) of that section;
4. (d) in a case where section 803 applies, the dividend mentioned in subsection (1)(b) of that section;
5. (e) any dividend the amount of which is, under section 811, treated as reduced.

(3) For the purposes of this section—

1. (a) the cases where an amount of eligible unrelieved foreign tax arises in respect of a dividend falling within subsection (2) above are the cases set out in subsections (4) and (5) below; and
2. (b) the amounts of eligible unrelieved foreign tax which arise in any such case are those determined in accordance with section 806B.

(4) Case A is where—

1. (a) the amount of the credit for foreign tax which under any arrangements would, apart from section 797, be allowable against corporation tax in respect of the dividend, exceeds
2. (b) the amount of the credit for foreign tax which under the arrangements is allowed against corporation tax in respect of the dividend.

(5) Case B is where the amount of tax which, by virtue of any provision of any arrangements, falls to be taken into account as mentioned in section 799(1) in the case of the dividend (whether or not by virtue of section 801(2) or (3)) is less than it would be apart from the mixer cap.

(6) In determining whether the circumstances are as set out in subsection (4) or (5) above, sections 806C and 806D shall be disregarded.

The amounts that are eligible unrelieved foreign tax

806B.—(1) This section has effect for determining the amounts of eligible unrelieved foreign tax which arise in the cases set out in section 806A(4) and (5).

(2) In Case A, the difference between—

1. (a) the amount of the credit allowed as mentioned in section 806A(4)(b), and
2. (b) the greater amount of the credit that would have been so allowed if, for the purposes of subsection (2) of section 797, the rate of corporation tax payable as mentioned in that subsection were the upper percentage,

shall be an amount of eligible unrelieved foreign tax.

(3) In Case B, where the mixer cap restricts the amount of tax to be taken into account as mentioned in section 799(1) in the case of the Case V dividend, the difference, in the case of that dividend, between—

1. (a) the amount of tax to be taken into account as there mentioned, and
2. (b) the greater amount of tax that would have been taken into account as there mentioned, had M in the formula in section 799(1A) in its application in the case of that dividend (but not any lower level dividend) been the upper percentage,

shall be an amount of eligible unrelieved foreign tax.

(4) In Case B, where the mixer cap—

1. (a) restricts the amount of underlying tax that is treated as mentioned in subsection (2) or (3) of section 801 in the case of any dividend received as mentioned in that subsection, but
2. (b) does not restrict the relevant tax in the case of any higher level dividend,

subsection (5) below shall apply.

(5) Where this subsection applies, an amount equal to the appropriate portion of the difference, in the case of the dividend mentioned in subsection (4)(a) above, between—

1. (a) the amount of underlying tax treated as mentioned in section 801(2) or (3), as the case may be, and
2. (b) the greater amount of underlying tax that would have been so treated, had M in the formula in section 799(1A) in its application in the case of that dividend (but not any higher or lower level dividend) been the upper percentage,

shall be an amount of eligible unrelieved foreign tax.

(6) For the purposes of subsection (5) above, the "appropriate portion" of the difference there mentioned in the case of any dividend is found by multiplying the amount of that difference by the product of the reducing fractions for each of the higher level dividends.

(7) For the purposes of subsection (6) above, the "reducing fraction" for any dividend is the fraction—

1. (a) whose numerator is the amount of the dividend; and
2. (b) whose denominator is the amount of the relevant profits (within the meaning of section 799(1)) out of which the dividend is paid.

(8) Any reference in this section to any tax being restricted by the mixer cap in the case of any dividend is a reference to that tax being so restricted otherwise than by virtue only of the application of the mixer cap in the case of one or more lower level dividends.

(9) For the purpose of determining the amount described in subsection (2)(b), (3)(b) or (5)(b) above, sections 806C and 806D shall be disregarded.

(10) In this section—

• "the Case V dividend" means the dividend mentioned in section 806A(1);
• "higher level dividend", in relation to another dividend, means any dividend—

1. (a) by which that other dividend is to any extent represented; and
2. (b) which either is the Case V dividend or is to any extent represented by the Case V dividend;

"lower level dividend", in relation to another dividend, means any dividend which—

1. (a) is received as mentioned in section 801(2) or (3); and
2. (b) is to any extent represented by that other dividend;

"the relevant tax" means—

1. (a) in the case of the Case V dividend, the foreign tax to be taken into account as mentioned in section 799(1); and
2. (b) in the case of any other dividend, the amount of underlying tax to be treated as mentioned in section 801(2) or (3) in the case of the dividend.

Onshore pooling

806C.—(1) In this section "qualifying foreign dividend" means any dividend which falls within section 806A(2), other than—

1. (a) an ADP dividend paid by a controlled foreign company;
2. (b) so much of any dividend paid by any company as represents an ADP dividend paid by another company which is a controlled foreign company;
457
3. (c) a dividend in respect of which an amount of eligible unrelieved foreign tax arises.

(2) For the purposes of this section—

1. (a) a "related qualifying foreign dividend" is any qualifying foreign dividend paid to a company resident in the United Kingdom by a company which, at the time of payment of the dividend, is related to that company;
2. (b) an "unrelated qualifying foreign dividend" is any qualifying foreign dividend which is not a related qualifying foreign dividend.

(3) For the purposes of giving credit relief under this Part to a company resident in the United Kingdom—

1. (a) the related qualifying foreign dividends that arise to the company in an accounting period shall be aggregated;
2. (b) the unrelated qualifying foreign dividends that arise to the company in an accounting period shall be aggregated;
3. (c) the underlying tax in relation to the related qualifying foreign dividends that arise to the company in an accounting period shall be aggregated;
4. (d) so much of the foreign tax paid in respect of the qualifying foreign dividends that arise to the company in an accounting period as is not underlying tax shall be aggregated.

(4) Credit relief under this Part shall be given as if—

1. (a) the related qualifying foreign dividends aggregated under paragraph (a) of subsection (3) above in the case of any accounting period instead together constituted a single related qualifying foreign dividend arising in that accounting period ("the single related dividend" arising in that accounting period);
2. (b) the unrelated qualifying foreign dividends aggregated under paragraph (b) of that subsection in the case of any accounting period instead together constituted a single unrelated qualifying foreign dividend arising in that accounting period ("the single unrelated dividend" arising in that accounting period);
3. (c) the underlying tax aggregated under paragraph (c) of that subsection for any accounting period were instead underlying tax in relation to the single related dividend arising in that accounting period (the "aggregated underlying tax" in respect of the single related dividend);
4. (d) the tax aggregated under paragraph (d) of that subsection for any accounting period were instead foreign tax (other than underlying tax) paid in respect of, and computed by reference to,—
   1. (i) the single related dividend arising in that accounting period,
   2. (ii) the single unrelated dividend so arising, or
   3. (iii) partly the one dividend and partly the other,
   (that aggregated tax being referred to as the "aggregated withholding tax").

(5) For the purposes of this section. a dividend paid by a controlled foreign company is an "ADP dividend" if it is a dividend by virtue of which (whether in whole or in part and whether taken alone or with one or more other dividends) no apportionment under section 747(3) falls to be made as regards an accounting period of the controlled foreign company in a case where such an apportionment would fall to be made apart from section 748(1)(a).

Utilisation of eligible unrelieved foreign tax

806D.—(1) For the purposes of this section, where—

1. (a) any eligible unrelieved foreign tax arises in an accounting period of a company, and
2. (b) the dividend in relation to which it arises is paid by a company which, at the time of payment of the dividend, is related to that company,

that tax is "eligible underlying tax" to the extent that it consists of or represents underlying tax.

(2) To the extent that any eligible unrelieved foreign tax is not eligible underlying tax it is for the purposes of this section "eligible withholding tax".

(3) For the purposes of giving credit relief under this Part to a company resident in the United Kingdom—

1. (a) the amounts of eligible underlying tax that arise in an accounting period of the company shall be aggregated (that aggregate being referred to as the "relievable underlying tax" arising in that accounting period); and
2. (b) the amounts of eligible withholding tax that arise in an accounting period of the company shall be aggregated (that aggregate being referred to as the "relievable withholding tax" arising in that accounting period).

(4) The relievable underlying tax arising in an accounting period of the company shall be treated for the purposes of allowing credit relief under this Part as if it were—

1. (a) underlying tax in relation to the single related dividend that arises in the same accounting period,
2. (b) relievable underlying tax arising in the next accounting period (whether or not any related qualifying foreign dividend in fact arises to the company in that accounting period), or
3. (c) underlying tax in relation to the single related dividend that arises in such one or more preceding accounting periods as result from applying the rules in section 806E,

or partly in one of those ways and partly in each or either of the others.

(5) The relievable withholding tax arising in an accounting period of the company shall be treated for the purposes of allowing credit relief under this Part as if it were—

1. (a) foreign tax (other than underlying tax) paid in respect of, and computed by reference to, the single related dividend or the single unrelated dividend that arises in the same accounting period,
2. (b) relievable withholding tax arising in the next accounting period (whether or not any qualifying foreign dividend in fact arises to the company in that accounting period), or
3. (c) foreign tax (other than underlying tax) paid in respect of, and computed by reference to, the single related dividend or the single unrelated dividend that arises in such one or more preceding accounting periods as result from applying the rules in section 806E,

or partly in one of those ways and partly in any one or more of the others.

(6) The amount of relievable underlying tax or relievable withholding tax arising in an accounting period that is treated—

1. (a) under subsection (4)(a) or (c) above as underlying tax in relation to the single related dividend arising in the same or any earlier accounting period, or
2. (b) under subsection (5)(a) or (c) above as foreign tax paid in respect of, and computed by reference to, the single related dividend or the single unrelated dividend arising in the same or any earlier accounting period,

must not be such as would cause an amount of eligible unrelieved foreign tax to arise in respect of that dividend.

Rules for carry back of relievable tax under section 806D

806E.—(1) Where any relievable tax is to be treated as mentioned in section 806D(4)(c) or (5)(c), the rules for determining the accounting periods in question (and the amount of the relievable tax to be so treated in relation to each of them) are those set out in the following provisions of this section.

(2) Rule 1 is that the accounting periods in question must be accounting periods beginning not more than three years before the accounting period in which the relievable tax arises.

(3) Rule 2 is that the relievable tax must be so treated that—

1. (a) credit for, or for any remaining balance of, the relievable tax is allowed against corporation tax in respect of the single dividend arising in a later one of the accounting periods beginning as mentioned in rule 1 above,
2. (b) credit for any of the relievable tax is allowed against corporation tax in respect of the single dividend arising in any earlier such accounting period.

(4) Rule 3 is that the relievable tax must be so treated that. before allowing credit for any of the relievable tax against corporation tax in respect of the single dividend arising in any accounting period, credit for foreign tax is allowed—

1. (a) first for the aggregated foreign tax in respect of the single dividend arising in that accounting period, so far as not consisting of relievable tax arising in another accounting period; and
2. (b) then for relievable tax arising in any accounting period before that in which the relievable tax in question arises.

(5) The above rules are subject to sections 806D(6) and 806F.

(6) In this section— aggregated foreign tax" means aggregated underlying tax or aggregated withholding tax; relievable tax" means relievable underlying tax or relievable withholding tax; the single dividend" means—

1. (a) in relation to relievable underlying tax, the single related dividend; and
2. (b) in relation to relievable withholding tax, the single related dividend or the single unrelated dividend.

Credit to be given for underlying tax before other foreign tax

etc

806F.—(1) For the purposes of this Part, credit in accordance with any arangements shall, in the case of any dividend, be given so far as possible—

1. (a) for underlying tax (where allowable) before foreign tax other than underlying tax;
2. (b) for foreign tax other than underlying tax before amounts treated as underlying tax; and
3. (c) for amounts treated as underlying tax (where allowable) before amounts treated as foreign tax other than underlying tax.

(2) Accordingly, where the amount of foreign tax to be brought into account for the purposes of allowing credit relief under this Part is subject to any limitation or restriction, the limitation or restriction shall be taken to have the effect of excluding foreign tax other than underlying tax before excluding underlying tax.

Claims for the purposes of section 806D(4) or (5)

806G.—(l) The relievable underlying tax or relievable withholding tax arising in any accounting period shall only be treated as mentioned in subsection (4) or (5) of section 806D on a claim.

(2) Any such claim must specify the amount (if any) of that tax—

1. (a) which is to be treated as mentioned in paragraph (a) of the subsection in question;
2. (b) which is to be treated as mentioned in paragraph (b) of that subsection; and
3. (c) which is to be treated as mentioned in paragraph (c) of that subsection.

(3) A claim under subsection (1) above may only be made before the expiration of the period of—

1. (a) six years after the end of the accounting period mentioned in that subsection; or
460
2. (b) if later, one year after the end of the accounting period in which the foreign tax in question is paid.

Surrender of relievable tax by one company in a group to

another

806H.—(1) The Board may by regulations make provision for, or in connection with, allowing a company which is a member of a group to surrender all or any part of the amount of the relievable tax arising to it in an accounting period to another company which is a member of that group at the time, or throughout the period, prescribed by the regulations.

(2) The provision that may be made under subsection (1) above includes provision—

1. (a) prescribing the conditions which must be satisfied if a surrender is to be made;
2. (b) determining the amount of relievable tax which may be surrendered in any accounting period;
3. (c) prescribing the conditions which must be satisfied if a claim to surrender is to be made;
4. (d) prescribing the consequences for tax purposes of a surrender having been made;
5. (e) allowing a claim to be withdrawn and prescribing the effect of such a withdrawal.

(3) Regulations under subsection (1) above—

1. (a) may make different provision for different cases; and
2. (b) may contain such supplementary, incidental, consequential or transitional provision as the Board may think fit.

(4) For the purposes of subsection (1) above a company is a member of a group if the conditions prescribed for that purpose in the regulations are satisfied.

interpretation of foreign dividend provisions of this Chapter

806J.—(1) This section has effect for the interpretation of the foreign dividend provisions of this Chapter.

(2) In this section, "the foreign dividend provisions of this Chapter" means sections 806A to 806Hon. and this section.

(3) For the purposes of the foreign dividend provisions of this Chapter, where—

1. (a) one company pays a dividend ("dividend A") to another company, and
2. (b) that other company, or a company which is related to it, pays a dividend ("dividend B") to another company,

dividend B represents dividend A, and dividend A is represented by dividend B, to the extent that dividend B is paid out of profits which are derived, directly or indirectly, from the whole or part of dividend A.

(4) Where—

1. (a) one company is related to another, and
2. (b) that other is related to a third company,

the first company shall be taken for the purposes of paragraph (b) of subsection (3) above to be related to the third, and so on where there is a chain of companies, each of which is related to the next.

(5) In any case where—

1. (a) a company resident outside the United Kingdom pays a dividend to a company resident in the United Kingdom, and
2. (b) the circumstances are such that subsection (6)(b) of section 790 has effect in relation to that dividend.

the foreign dividend provisions of this Chapter shall have effect as if the company resident outside the United Kingdom were related to the company resident in the United Kingdom (and subsection (10) of that section shall have effect accordingly).

(6) Subsection (5) of section 801 (related companies) shall apply for the purposes of the foreign dividend provisions of this Chapter as it applies for the purposes of that section.

(7) In the foreign dividend provisions of this Chapter—

• "aggregated underlying tax" shall be construed in accordance with section 806C(4)(c);
• "aggregated withholding tax" shall be construed in accordance with section 806C(4)(d);
• "controlled foreign company" has the same meaning as in Chapter IV of Part XVII;
• "eligible unrelieved foreign tax" shall be construed in accordance with sections 806A and 806B;
• "the mixer cap" means section 799(1)(b);
• "qualifying foreign dividend" has the meaning given by section 806C(1);
• "related qualifying foreign dividend" has the meaning given by section 806C(2)(a);
• "relievable tax" has the meaning given by section 806E(6);
• "relievable underlying tax" shall be construed in accordance with 806D(3)(a);
• "relievable withholding tax" shall be construed in accordance with 806D(3)(b);
• "single related dividend" shall be construed in accordance with section 806C(4)(a);
• "single unrelated dividend" shall be construed in accordance with section 806C(4)(b);
• "the upper percentage" is 45 per cent."

(2) The amendments made by sub—paragraph (1) have effect in relation to—

1. (a) dividends arising on or after 31st March 2001, and
2. (b) foreign tax in respect of such dividends,

(and accordingly the single related dividend or the single unrelated dividend which falls to be treated under those amendments as arising in any accounting period of a company shall not include any dividend arising on or before 30th March 2001).

Application of foreign dividend provisions to branches or agencies

in the UK of persons resident elsewhere

20.—(1) After section 806J of the Taxes Act 1988 insert—

"Application of foreign dividend provisions to branches or

agencies in the UK of persons resident elsewhere

806K.—(1) Sections 806A to 806J shall apply in relation to an amount of eligible unrelieved foreign tax arising in a chargeable period in respect of any of the income of a branch or agency in the United Kingdom of a person resident outside the United Kingdom as they apply in relation to eligible unrelieved foreign tax arising in an accounting period of a company resident in the United Kingdom in respect of any of the company's income, but with the modifications specified in subsection (2) below.

(2) Those modifications are—

1. (a) take any reference to an accounting period as a reference to a chargeable period;
2. (b) take any reference to corporation tax as including a reference to income tax;
3. (c) take the reference in section 806A(4)(a) to section 797 as a reference to sections 796 and 797;
4. (d) in relation to income tax, for subsection (2) of section 806B substitute the subsection (2) set out in subsection (3) below.

(3) That subsection is—

"(2) In Case A, the difference between—

1. (a) the amount of the credit allowed as mentioned in section 806A(4)(b), and
462
2. (b) the greater amount of credit that would have been so allowed if, for the purposes of section 796, the amount of income tax borne on the dividend as computed under that section were charged at a rate equal to the upper percentage,

shall be an amount of eligible unrelieved foreign tax."."

(2) The amendment made by sub—paragraph (1) has effect in relation to—

1. (a) dividends arising on or after 31st March 2001, and
2. (b) foreign tax in respect of such dividends,

(and accordingly the single related dividend or single unrelated dividend which by virtue of that amendment falls to be treated as arising in any chargeable period shall not include any dividend arising on or before 30th March 2001).

Unrelieved foreign tax: profits of overseas branch or agency

20A.—(1) After section 806K of the Taxes Act 1988 insert—

"Unrelieved foreign tax: profits of overseas branch or agency

Carry forward or carry back of unrelieved foreign tax

806L.—(1) This section applies where, in any accounting period of a company resident in the United Kingdom, an amount of unrelieved foreign tax arises in respect of any of the company's qualifying income from an overseas branch or agency of the company.

(2) The amount of the unrelieved foreign tax so arising shall be treated for the purposes of allowing credit relief under this Part as if it were foreign tax paid in respect of, and computed by reference to, the company's qualifying income from the same overseas branch or agency—

1. (a) in the next accounting period (whether or not the company in fact has any such income from that source in that accounting period), or
2. (b) in such one or more preceding accounting periods, beginning not more than three years before the accounting period in which the unrelieved foreign tax arises, as result from applying the rules in subsection (3) below,

or partly in the one way and partly in the other.

(3) Where any unrelieved foreign tax is to be treated as mentioned in paragraph (b) of subsection (2) above, the rules for determining the accounting periods in question (and the amount of the unrelieved foreign tax to be so treated in relation to each of them) are that the unrelieved foreign tax must be so treated under that paragraph—

1. that—

1. (a) credit for, or for any remaining balance of, the unrelieved foreign tax is allowed against corporation tax in respect of income of a later one of the accounting periods beginning as mentioned in that paragraph, before
2. (b) credit for any of the unrelieved foreign tax is allowed against corporation tax in respect of income of any earlier such period;

2. that, before allowing credit for any of the unrelieved foreign tax against corporation tax in respect of income of any accounting period, credit for foreign tax is allowed—

1. (a) first for foreign tax in respect of the income of that accounting period, other than unrelieved foreign tax arising in another accounting period; and
2. (b) then for unrelieved foreign tax arising in any accounting period before that in which the unrelieved foreign tax in question arises.

(4) For the purposes of this section, the cases where an amount of unrelieved foreign tax arises in respect of any of a company's qualifying income from an overseas branch or agency in an accounting period are those cases where—

1. (a) the amount of the credit for foreign tax which under any arrangements would, apart from section 797, be allowable against corporation tax in respect of that income, exceeds
2. (b) the amount of the credit for foreign tax which under the arrangements is allowed against corporation tax in respect of that income;

and in any such case that excess is the amount of the unrelieved foreign tax in respect of that income.

(5) For the purposes of this section, a company's qualifying income from an overseas branch or agency is the profits of the overseas branch or agency which are—

1. (a) chargeable under Case I of Schedule D; or
2. (b) included in the profits of life reinsurance business or overseas life assurance business chargeable under Case VI of Schedule D by virtue of section 439B or 441.

(6) Where (whether by virtue of this subsection or otherwise) an amount of unrelieved foreign tax arising in an accounting period falls to be treated under subsection (2) above for the purposes of allowing credit relief under this Part as foreign tax paid in respect of, and computed by reference to, qualifying income of an earlier accounting period, it shall not be so treated for the purpose of any further application of this section.

(7) In this section "overseas branch or agency", in relation to a company, means a branch or agency through which the company carries on a trade in a territory outside the United Kingdom.

Provisions supplemental to section 806L

806M.—(1) This section has effect for the purposes of section 806L and shall be construed as one with that section.

(2) If, in any accounting period, a company ceases to have a particular overseas branch or agency, the amount of any unrelieved foreign tax which arises in that accounting period in respect of the company's income from that overseas branch or agency shall, to the extent that it is not treated as mentioned in section 806L(2)(b), be reduced to nil (so that no amount arises which falls to be treated as mentioned in section 806L(2)(a)).

(3) If a company—

1. (a) at any time ceases to have a particular overseas branch or agency in a particular territory ("the old branch or agency"), but
2. (b) subsequently again has an overseas branch or agency in that territory ("the new branch or agency"),

the old branch or agency and the new branch or agency shall be regarded as different overseas branches or agencies.

(4) If, under the law of a territory outside the United Kingdom, tax is charged in the case of a company resident in the United Kingdom in respect of the profits of two or more of its overseas branches or agencies in that territory, taken together, then, for the purposes of—

1. (a) section 806L, and
2. (b) subsection (3) above.

those overseas branches or agencies shall be treated as if they together constituted a single overseas branch or agency of the company.

(5) Unrelieved foreign tax arising in respect of qualifying income from a particular overseas branch or agency in any accounting period shall only be treated as mentioned in subsection (2) of section 806L on a claim.

(6) Any such claim must specify the amount (if any) of the unrelieved foreign tax—

1. (a) which is to be treated as mentioned in paragraph (a) of that subsection; and
2. (b) which is to be treated as mentioned in paragraph (b) of that subsection.

(7) A claim under subsection (5) above may only be made before the expiration of the period of—

1. (a) six years after the end of the accounting period mentioned in that subsection, or
2. (b) if later, one year after the end of the accounting period in which the foreign tax in question is paid."

(2) The amendment made by sub-paragraph (1) has effect in relation to unrelieved foreign tax arising in any accounting period ending on or after 1st April 2000.

(3) No such tax shall be treated by virtue of that amendment as foreign tax in respect of income arising in any accounting period ended on or before 31st March 2000.'.

No. 107, in page 531, line 8, at end insert—

'Restriction of interest on repayment of tax resulting from carry

back of relievable tax

25A.—(1) Amend section 826 of the Taxes Act 1988 as follows.

(2) After subsection (7B) insert—

"(7BB) Subject to subsection (7BC) below, in any case where—

1. (a) within the meaning of section 806D, any relievable underlying tax or relievable withholding tax arises in an accounting period of a company ("the later period"),
2. (b) pursuant to a claim under section 806G, the whole or any part of that tax is treated as mentioned in section 806D(4)(c) or (5)(c) in relation to the single related dividend or the single unrelated dividend arising in an earlier accounting period ("the earlier period"), and
3. (c) a repayment falls to be made of corporation tax paid for the earlier period or of income tax in respect of a payment received by the company in that period,

then, in determining the amount of interest (if any) payable under this section on the repayment referred to in paragraph (c) above, no account shall be taken of so much of the amount of the repayment as falls to be made as a result of the claim under section 806G, except so far as concerns interest for any time after the date on which any corporation tax for the later period became due and payable (as mentioned in subsection (7D) below).

(7BC) Where, in a case falling within subsection (7A)(a) and (b) above—

1. (a) as a result of the claim under section 393A(1), an amount or increased amount of eligible unrelieved foreign tax arises for the purposes of section 806A(1), and
2. (b) pursuant to a claim under section 806G, the whole or any part of an amount of relievable underlying tax or relievable withholding tax is treated as mentioned in section 806D(4)(c) or (5)(c) in relation to the single related dividend or the single unrelated dividend arising in an accounting period before the earlier period,

then subsection (7BB) above shall have effect in relation to the claim under section 806G as if the reference in the words after paragraph (c) to the later period within the meaning of that subsection were a reference to the period which, in relation to the claim under section 393A(1), would be the later period for the purposes of subsection (7A) above."

(3) In subsection (7D) (date on which corporation tax is due and payable for the purposes of certain provisions) after "(7B)" insert (7BB)".

(4) In subsection (7E) (which, for the purposes of certain provisions, restricts the power in section 59A of the Taxes Management Act 1970 to alter the date on which corporation tax is due and payable) after "(7B), ", in both places where it occurs, insert "(7BB),".'.— [Mr. Dowd.]