CONTROLLED FOREIGN COMPANIES: TERRITORIAL EXCLUSIONS FROM S.748 EXEMPTIONS (Hansard, 8 May 2002)

§ Mr. Flight
I beg to move amendment No. 26, in page 63, line 14, at end insert— '(6) A period of 6 months' notice shall be given prior to the laying of a statutory instrument, as provided for in subsection (5) above.' This is essentially a probing amendment. It is intended to establish whether the Government are willing to consider relaxing the measures in clause 88. Conservative Members are extremely uncomfortable with the clause 236 and its background. For reasons connected with the national interest, we are particularly unhappy about the fact that it makes Britain a marginally less attractive place for a multinational company to have its headquarters. It introduces a degree of uncertainty to the international structure of such companies.
Clause 88 gives the Treasury an arbitrary power to designate territories where CFC exemptions for UK-based groups will be removed. Although I duly note that an affirmative resolution of the House is required, self-evidently the present Government have a majority that will make that little more than a formality.
Let me say something about the background to the clause. I do not know why, but there was some misreporting of it in the press. It was said that the clause related to a disagreement—shall I say?—between the Paymaster General and Jersey on the savings directive, which threatened the deal allowing it to be an alternative to a common European Union withholding tax. Whether there is a disagreement is debateable, but the matter relates to the Primarolo report on EU unfair tax competition and not to the savings directive.
The Committee may remember that the Primarolo report identified in EU member states, various British dependencies and elsewhere, what it considered instances of unfair tax competition that resulted, among other things, in particular locations getting business because of specific tax incentives. At the outset, EU members considered applying their code and principles to other key parts of the world—the United States and Switzerland in particular—on the basis of the sensible argument that not bringing them in would merely drive capital away from the EU and places like the British dependencies. As I understand it, that developed slightly later into an attempt by EU member states to get a commitment that the same measures would be introduced in British dependent territories, even though they are not members of the EU. In relation to key third territories, the concept was to try to promote the adoption of equivalent measures. I think that there was a slight change from the original intentions in that regard.
As I understood it£I remember reading the report£the main offender was the Netherlands, which I think had 66 cases of allegedly unfair tax practices, while the British dependent territories of the Channel Islands and the Isle of Man had relatively few such cases. I recollect that the report stated that the UK would do its best to persuade its dependent territories to come into line with what was being introduced in the EU, but also made it clear the UK had limited constitutional powers and could do its best only within that framework.
I understand that a week or so before the Budget announcement—I think on 10 April—a conversation occurred between the Paymaster General and the chairman of the Jersey policy resources committee, who is the senior politician in Jersey. In essence, the Paymaster General told that gentleman that if Jersey did not sign up within a week to the EU code of conduct on unfair tax competition, the UK would introduce options for putting economic pressures on Jersey to do so.

§ Dawn Primarolo
Will the hon. Gentleman explain whether he is merely repeating what has been alleged in the press or whether he has been told by the senator concerned that that was the content of our conversation? 237 He needs to be clear on the matter, because if he wants to pursue that route, there will be a sharp dispute between us about what was said and when. If he is repeating what was reported in the press, perhaps he could say so.

§ Mr. Flight
I thank the Paymaster General for those comments. In fact, I recollect press reports that had nothing to do with the matter, but were all about the savings directive. The document that I have is the EU tax package statement by the gentleman in question to the Senate in Jersey, and I shall refer to some points in that statement.

§ Dawn Primarolo
May I ask the hon. Gentleman not to read from the document selectively? The senator whose statement to the Jersey Parliament the hon. Gentleman is talking about referred to the fact that discussions went on between Jersey and the United Kingdom for some two years.

§ Mr. Flight
I am aware of that, and I will be referring to those discussions, which went on for some time. I am sure that the Paymaster General may be able to elucidate a little further what those discussions were about. In commonsense language, as I understand the situation, there were discussions with the various dependent territories, particularly with regard to exempt companies; the Jersey authorities were less co-operative than the Guernsey and Isle of Man authorities and sought to negotiate terms, because the administration of companies forms a larger proportion of the Jersey gross domestic product than it does elsewhere.

§ Dawn Primarolo
Perhaps the hon. Gentleman would like to explain whether his speech is intended to defend the UK interest, or Jersey's interests.

§ Mr. Flight
rose—

§ Sir Teddy Taylor
Before my hon. Friend responds to that intervention, will he point out that Jersey has no representative in the House of Commons to speak for it?

§ Mr. Flight
I will come to the UK interest, but it is important to raise the matter, partly for the reason that my hon. Friend has mentioned and partly because in some senses the British dependencies are part of British interests. If, as a result of clause 88, we end up damaging our own self-interest, that will not be particularly sensible. [Interruption.] May I continue? It is healthy that this matter should be out in the open, particularly where, for some reason, what appeared in the press, particularly the Financial Times, was far from what the matter was all about.
The Paymaster General's discussions with Jersey were also about what the Organisation for Economic Co-operation and Development has been concerned with in the territories. It is interesting to note that roughly a year ago the United States Government changed policy and broadly made the point to the OECD that it was not entirely proper to over-interfere in the internal tax affairs of sovereign states. I would be interested to know whether 238 the United States change of policy was acknowledged by the Government here, and what the opinions about that were.
To deal with the Jersey matter, my practical point is that it is in the UK's interest, no matter how difficult it may be, to resolve British policy objectives directly with Jersey. It is unfortunate that the resulting power that the Paymaster General has introduced in clause 88 does not relate specifically to the Government's disagreement with Jersey. It has a much wider application.
I realise that the Paymaster General may seek to talk about precedent, but as I said at the outset, under clause 88, a UK-based multinational will face the arbitrary possibility that the exemption rules applying to controlled foreign companies, on which basis it may have structured itself, could suddenly change if the Government choose to use the powers in clause 88. As a result, its CFC exemptions would be suspended.
The amendment would provide a cooling-off period, and introduce the concept of giving six months' notice of an intention to bring forward such legislation. One hopes that that would force agreement between the UK and the relevant dependent territory, and it would also enable UK-based multinational companies to examine their global structure and to change it, having been given notice of such legislation by the UK Government.
I finish by returning to the Jersey issue, and Jersey's response—as I understand it—to the Paymaster General, following the famous telephone conversation in which Jersey was required to commit. The key clause states: We have said clearly to the Treasury that, subject to safeguarding our vital economic interests and to a clear level playing field, we shall take the Code of Conduct principles into account in our review of fiscal strategy and also examine whether we can address the Directive by adopting measures that are the same as, or equivalent to, those set out in it. We have emphasised that in any event we recognise the wish of EU Member States to limit as far as possible any circumvention of the Directive, if or when it comes into force, and that accordingly we shall not allow Jersey to be a place outside the EU where EU residents could avoid paying their due taxes. As my letter to the Minister makes clear, we want to reach an agreement with the UK on the Tax Package and we are ready and willing to enter into constructive discussions to that effect. The progress of our fiscal strategy review makes that now timely. It would be in the UK's and London's interests if the UK and Jersey could reach an agreement here. It is unfortunate that the Government have resorted to the instrument constituted by clause 88, which has a wider application than merely the specific discussions with Jersey.

§ Mr. Edward Davey
I rise so that we can return the debate to amendment No. 26. I have some sympathy with it, but its implications have not been explored in recent moments.
The explanatory notes and Budget press notices do not offer sufficient explanation of, or justification for, clause 88, so the Government need to offer some. The Committee needs to be aware that it would empower the Treasury to make regulations that would affect companies' commercial 239 decisions overnight. One assumes that such regulations would not be retrospective, and it would help if the Paymaster General could confirm that.

§ Mr. Flight
rose—

§ Mr. Davey
I shall give way to the hon. Gentleman, provided that he is not going to talk about Jersey.

§ Mr. Flight
I did make the point that the measures would in effect be retrospective. If a group has a structure or its CFCs in a certain jurisdiction, but it is suddenly decreed that CFC exemptions are not valid there, that is effectively retrospective.

§ Mr. Davey
The hon. Gentleman is redefining the term "retrospective" with that argument. It is a concern, but not in the way that he suggests. My concern is that the clause gives the Government the opportunity to produce an instrument to change the rules on CFCs at any stage during the financial year. Governments in the past have been able to do so every year in the Budget and the Finance Bill. Every year, the Government get their sticky fingers on the tax statutes and change the law. All companies and individuals know that the tax regime may change in the next financial year. That degree of instability is built into the system and we cannot get around that unless we stop having annual Finance Bills. That might be a good idea, but I would be ruled out of order for pursuing it. However, the clause would build in extra instability over and above the annual Finance Bill. That is the concern, and the Government have yet to make the case that the power is necessary between annual Finance Bills.

§ Sir Teddy Taylor
I hope that the Minister will reconsider this important issue. This clause does not mention the Channel Islands, just as the previous clause did not mention Taiwan. I had the pleasure of having breakfast in Portcullis House last week with senators from Jersey who explained their concern about the provision. I should point out that I paid the bill, so there is no question of anything unusual.
The senators had several concerns. The Minister will be aware that it has been widely reported—the senators who spoke to me confirmed it—that those involved had been told to agree to the code of conduct, lest economic sanctions be levied against them. I am sure that the Government will deny that shameful behaviour. However, the clause contains unusual wording that would horrify Members, especially Labour Members who claim to believe in democracy, if they read it. Clause 88 states that regulations may be introduced that may make different provision … with respect to different territories". In other words, there might be one rule for Jersey and another for a different country. That should worry us all.
The regulations may also contain such incidental, supplemental, consequential or transitional provision as the Treasury may think fit. So we would be giving the Government a blank cheque to introduce whatever measures they think fit, subject to the approval of regulations. They could bring in different rules for different countries or places.
240 I hope that the Minister will accept that the Channel Islands have some of the highest standards of financial operation to be found anywhere in the world. We had a recent report on money laundering in which the Channel Islands were not even mentioned as being suspected of involvement. The Channel Islands are also the second major source of capital for London finances. Surely the Government should be concerned to try to preserve that.
As the Minister is well aware, the code of conduct that she initiated in the EU, among all the nonsensical talk about a withholding tax—it cannot happen unless Britain agrees to it—has meant that we are stuck with forcing the Channel Islands to do something that they do not want to do. It will be much against their financial interests. If the Minister doubts that, she should speak, as I have, to senators from Jersey who are very concerned, worried and alarmed. The Minister may argue that the people of Guernsey are not suffering, but she will probably know that they have a very different sort of business from that carried on in Jersey.
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Why is the Minister introducing this measure? Why does she want the power to bring in different regulations to apply to different countries? The Minister may say that the circumstances are different, but surely a law should be applied fairly and squarely. Many of us who care about Britain and the high standards that have been maintained here are worried that the Channel Islands will be undermined by the code of conduct that has been introduced. The Minister may remember that she said at the time that the code was not available, but I was able to get hold of a copy. My hon. Friend the Member for West Worcestershire (Sir Michael Spicer) is present, and he will recall that I obtained a copy simply by telephoning Brussels for one.
Will the Minister explain why the Government want the power to bring in regulations that will apply to different places in different ways? The Channel Islands do not belong to the EU, and have always had the right to make their own decisions on taxes. Can the Minister assure the Committee that there is no question that the Channel Islands will be subject to sanctions, and that no pressure will be applied, under the clause, to force them to do something that they do not want to do and that they do not consider in their interests?
Finally, Britain's interest in the EU obliges us all to do many things that we do not want to do. The Minister may remember that we spoke about the Bank of England being forced to sell gold, but the price today is $309 per ounce. The price at which we sold means that Britain has lost hundreds of millions of pounds. Ministers either seem uninterested, or they say that there is nothing to be done.
I know that it would be out of order to go beyond the clause. However, the powers in the clause have never appeared in legislation before. They would allow provisions to be applied differently in different areas. We have treated the Channel Islands in a shameful manner that is against the interests of Britain and the world. The provision is also against the interests of those who believe in maintaining high standards of financial conduct in the financial world.

§ Dawn Primarolo
I shall begin by explaining the provisions of clause 88. The clause provides for a reserve 241 power to make regulations specifying overseas jurisdictions in which controlled foreign companies would automatically fall within the charge to tax made by the controlled foreign company rules.
The aim of the measure is to protect the UK's economic interests and tax base against harmful tax practices where they continue to be prevalent. It reflects the Government's determination to promote fair tax competition and to take effective action where jurisdictions do not remove the harmful features of their tax regimes. It will not be used where appropriate action is being taken by jurisdictions to remove harmful tax practices.
I shall explain the parliamentary process involved and the precedents; finally, I shall explain what will happen next.
Regulations specifying a jurisdiction would require the express consent of Parliament. The regulation-making power is subject to the affirmative resolution procedure, so no jurisdiction can be designated unless and until the House votes through regulations to that effect; only then would the tax rules for controlled foreign companies be affected.
The controlled foreign companies rules are designed to stop UK companies reducing their UK tax liabilities by diverting profits to subsidiaries situated in low-tax regimes. The rules work, broadly, by charging UK parent companies of controlled foreign companies on an amount equal to the profits that would otherwise avoid tax.
At present, there are a number of specific exemptions from these rules that exclude from their effects the vast majority of overseas subsidiaries of UK companies. The measure would give the reserve power to make regulations to exclude from these exemptions companies that carry on business in the designated jurisdiction and would, in effect, bring them into UK tax charge.
We have introduced this measure because, although much progress has been made towards eliminating harmful tax practices, we must be able to take effective action against jurisdictions that do not remove them in order to afford more protection for the United Kingdom tax base. Those are the obligations of Ministers and, I should have thought, of all Members.
It is the responsibility of Governments to protect their tax base, and by taking this action we signal that we are serious about our desire to see the United Kingdom's interests protected. The Government strongly support international initiatives aimed at curbing harmful and anti-competitive tax practices. In particular, that means encouraging our dependent territories to co-operate fully with the two key initiatives—the code of conduct and the draft directive on taxation of savings, which are contained in the European tax package—that are so crucial to the City of London.
The United Kingdom has committed itself to promoting the principles in the code. We believe that our dependent territories should match up to the highest international standards and be part of international efforts to ensure fair tax competition. As major offshore financial centres, they depend on the health of European economies.
We will all benefit if there is strong and healthy competition—but only if the competition is fair and not simply predatory. This measure provides the Government 242 with a reserve power to take considered action, with the full authority of Parliament, when such action is necessary to protect the tax base and the United Kingdom's economic interests.

§ Denzil Davies (Llanelli)
I think that we all understand the purpose behind the legislation. Is it not a legitimate concern that, as I understand it, under the reserve powers the tax rates of companies can be increased in the middle of a financial year by secondary legislation?

§ Dawn Primarolo
If such a regulation were sought from the House, it would become effective at the company's next accounting period, whether it was in January or April. It is not retrospective.
The Government hope that, by negotiation, agreement will be achieved. However, there have been a number of occasions in the past when the United Kingdom has taken defensive measures against other jurisdictions to defend its economic interests and tax base. For example, the United Kingdom terminated two double tax treaties, with the British Virgin Islands in 1971 and the Dutch Antilles in 1988. Both treaties were terminated to defend United Kingdom interests.
In 1985, with the full support of the then Opposition, the Conservative Government secured provisional powers—the same type of reserve powers as these—to act against unitary taxation, specifically directed at California. Section 812 of the Taxes Act 1988 allows the Treasury to make an order prescribing a unitary state, and is still on the statute book.
There are strong political, economic and historic ties between the dependent territories and the United Kingdom. In many cases, that relationship contributes strongly to their undoubted success as offshore financial centres. However, mutual responsibility cuts both ways, and it would be highly unrealistic and irresponsible to expect us to allow them to enjoy the benefits without contributing to the way forward.
On the comments that have been made about Jersey, let me give hon. Members one example. There are about 19.000 exempt companies in Jersey. They pay a charge of £600—that is all—which means that they have to pay no tax at all on their income on profits arising outside Jersey. Moreover, at the moment they are not taxed anywhere else. It does not seem unreasonable that we should, as part of the international debate about tracking terrorist finance, dealing with money laundering, addressing fair tax competition and eradicating niche regimes, expect to advance this argument with our dependent territories, and they are engaging with us on that.
The UK dependent territories have the capacity and expertise to prosper without recourse to internationally damaging tax practices, and their reputations and long-term viability will be enhanced by their being part of these international initiatives. Guernsey's advisory and finance committee president, Laurie Morgan, was reported only two weeks ago as saying—as have those in other dependent territories—that he was confident that the industry would be able to adapt to any changes implemented as a result of adopting international standards. No dependent territory is being asked to do anything that the United Kingdom would not do. No dependent territory is being asked to move first or to change its system without others in the international 243 framework doing the same. No dependent territory is being asked to do anything apart from engaging on a level playing field, helping us to take forward initiatives whereby all of us will prosper.
The amendment would put back by six months the best interests of the United Kingdom economically and in defending its tax base. The provisions in the reserve power provide, first, for the Government to introduce regulations and, secondly, for that to be debated in the House: only then will the matter be acted on. I say to the hon. Member for Kingston and Surbiton (Mr. Davey) that no retrospection is involved. If the regulations were required—I hope that they will not be, but the UK must be strong in signalling its intention to defend itself—the earliest date on which they could be made is that of the passing of the Bill. If regulations become necessary, they will specify exactly what they are doing, and no power within them can be retrospective. The UK is defending its economic interests and its tax base, sending a clear message to all jurisdictions about how we will conduct ourselves in the international field.

§ Sir Teddy Taylor
The Minister mentioned money laundering as one of the reasons for the regulations. Is she aware that the recent report on upholding money laundering issues throughout the world specifically excluded the Channel Islands altogether?

§ Dawn Primarolo
I used money laundering as one example of international practices that were improving. The regulations will tackle harmful tax competition and predatory tax regimes that seek to undermine legitimate fair tax competition; they have nothing to do with money laundering.
I call on every Member to vote for the best economic interests of the United Kingdom, to defend its tax base, to support the clause and to reject the amendment because it would deny us those opportunities—[Interruption.]

The Temporary Chairman
Order. I remind the Committee that a debate is under way.

§ Mr. Flight
As I pointed out, the amendment was, in essence, a probing one. The Government have taken excessive powers, but I beg to ask leave to withdraw the amendment.

§ Mr. Eric Forth (Bromley and Chislehurst)
On a point of order, Madam Deputy Speaker. The parliamentary day is drawing to a close and, yet again—unless you are able to tell us to the contrary—we have had no indication from 244 the Secretary of State for Transport, Local Government and the Regions that he wishes to come to the House, to make an apology, to make a statement or, indeed, to offer his resignation. Can you give us any information, Madam Deputy Speaker, as to whether you have received an approach from the Secretary of State—even at this late hour—to honour the House with his presence, to purge the contempt for the House that he has shown hitherto, and to allow the House to question him and hold him to account, as is our duty?

§ Madam Deputy Speaker (Sylvia Heal)
I must inform the right hon. Gentleman and other Members that I have not received any communication from the Secretary of State or anyone else. The right hon. Gentleman is an experienced Member and I am sure that he is well aware of a very well-tried method of obtaining information—he may wish to pursue it at the earliest opportunity.

§ Mr. Douglas Hogg (Sleaford and North Hykeham)
Further to that point of order, Madam Deputy Speaker. Will you clarify this point? Is it not usual, when the shadow Leader of the House rises to make a very serious point of order, for the Leader of the House to be present to listen to it? The right hon. Gentleman, who is the custodian of the traditions of the House, could at least communicate to his right hon. Friend the Secretary of State for Transport, Local Government and the Regions how angry the House is about his conduct.

§ Madam Deputy Speaker
In the absence of any information being given to the Leader of the House about the point of order, I should not expect him to be present.

§ Mr. Crispin Blunt (Reigate)
Further to that point of order, Madam Deputy Speaker. A headline on Ceefax tonight stated that the Secretary of State had been in discussions with Mr. Speaker. Can you give the House any information about that?

§ Madam Deputy Speaker
I have to inform the hon. Gentleman that I am in no way responsible for whatever appears on Ceefax.

§ Dr. Julian Lewis (New Forest, East)
Further to that point of order, Madam Deputy Speaker. Will you take this opportunity to reaffirm the guidance given to me and other new Members of the 1997 intake by Speaker Boothroyd that, as Members, we enjoy the privilege of being able to say what we like in the House without suffering the risk of defamation proceedings? Do you agree, Madam Deputy Speaker, that if a Secretary of State has not only misled the House but has defamed an individual in the way that Mr. Sixsmith was defamed, the individual is entitled to expect a withdrawal in the House and for his name to be cleared?

§ Madam Deputy Speaker
I have already ruled on that and given my response to the right hon. Member for Bromley and Chislehurst (Mr. Forth).

§ Mr. John Gummer (Suffolk, Coastal)
On a point of order, Madam Deputy Speaker. Mr. Speaker said earlier in the Session that he was concerned to ensure that announcements would be made to the House and not outside. Therefore, I put it to you that on this occasion 245 this is a matter about which the Chair ought to be concerned, for an announcement was made outside the House about the proceedings in the House. Would it not therefore be appropriate for the Chair to make inquiries as to when this might be remedied here, in this Chamber?

§ Madam Deputy Speaker
I have absolutely no doubt that Mr. Speaker, if he is not aware already, will read Hansard tomorrow. I remind all hon. Members that I have already made a suggestion and ruled on this matter. If there are any points of order other than on that subject, I am prepared to take them.

§ Mr. Forth
In view of the gravity of this matter, Madam Deputy Speaker, and in view of the fact that the Secretary of State is apparently unwilling voluntarily to come to the House, may I give notice that Her Majesty's Opposition will tonight table a motion of censure on the Secretary of State?

§ Mrs. Angela Browning (Tiverton and Honiton)
On a point of order, Madam Deputy Speaker. If a Member of the House accuses another Member, particularly a Minister, of misleading the House, the procedures that you would exercise are very clear, unless the Member immediately withdraws the accusation; so, from the point of view of Members of the House, especially Back Benchers, the procedures are clear. However, if the House is misled by Ministers there seems to be absolutely no redress. The imbalance in our procedures becomes clearer with every event such as this that passes, so I hope that you, Madam Deputy Speaker, will discuss this with Mr. Speaker as a matter of urgency.

§ Madam Deputy Speaker
I have already suggested to the shadow Leader of the House the route that is available to any Back Bencher, but I will see that the hon. Lady's comments are drawn to the attention of Mr. Speaker.