SCHEDULE TAX (Hansard, 22 July 1999)

§ Lord McIntosh of Haringey

My Lords, I beg to move that the House do agree with the Commons in their 1192 Amendment No. 5. It may be for the convenience of the House if I speak to that before the noble Baroness speaks to her amendments, Amendments Nos. 5A and 5B.

We said at the Report stage on 2nd March that we had agreed the principles of a tax solution which would provide the CDC PPP with the required tax efficiency and that we intended to introduce necessary amendments to the CDC Bill at the appropriate time in the House of Commons. I have acknowledged that the appropriate time was late in parliamentary terms and I have apologised for that. Amendment No. 5 was paved by Amendment No. 1.

The overall policy aim of the proposal is to provide the CDC with a level playing field in relation to competitors located outside the UK so it can achieve its goal of investing in developing countries using private capital raised in the context of a competitive private investment market. It does not seek to give the CDC anything more than that.

The key element of the new schedule is that (unless the partnership were to end) the CDC's (and only the CDC's) income and chargeable gains would not be chargeable to UK corporation tax, capital gains tax or income tax. The CDC would remain liable to applicable local taxes as at present and investors in the CDC would be liable to tax on their income and gains according to their own circumstances. It is also intended that where the CDC undertakes activities other than investment (such as investment management) this would be undertaken through a separate subsidiary, subject to tax in the normal way. That is the answer to the point raised by the noble Viscount, Lord Eccles, about fee income.

The provisions of the new schedule and reasons for them are reasonably straightforward. The exempt period in paragraph 1 provides for the exemption from tax to begin on a day appointed by the Secretary of State by order. Our intention is that the exemption should take effect at the same time as the CDC's new capital structure is implemented so that the CDC can start to develop a financial track record on the same basis as it will go to market.

There is always a potential state aids angle in any government sale. We have discussed this informally with the European Commission and we do not consider that either the tax, or balance sheet proposals more generally, will distort intra-Community trade. However, we intend to notify the European Commission of the tax proposals along with the capital restructuring, and any other relevant details, to provide investors with certainty.

The exemption, like the partnership, is intended to be an indefinite arrangement which will remain in place for the foreseeable future. But paragraph 1 also provides a necessary protection in that if Parliament were to decide, under the provisions of Clause 18, that the special share could be redeemed, and it then was redeemed, the exemption would come to an end with the partnership.

Paragraph 2 covers the main substance of the tax treatment. It provides that the CDC's income and chargeable gains will not be chargeable to corporation tax in the UK. The CDC will also be exempt from capital gains tax and income tax (under existing 1193 provisions of the Income and Corporation Taxes Act 1988) but will be liable to other taxes such as VAT and stamp duty.

Sub-paragraph (2) is a technical provision, necessary because the language used in legislation dealing with controlled foreign companies refers to a charge arising which is equal to corporation tax rather than it being actual corporation tax, so the CDC's exemption would not necessarily cover this.

Paragraph 3 is about residence for tax purposes and would apply only if the partnership had been brought to an end following the redemption of the special share. Although it is not our intention that this should happen, it is not possible to bind future governments. Therefore, it is necessary to make clear now what will happen if the exemption were to end. Investors will require comfort as to what will happen to them in these circumstances since any decision under Clause 18 would he for Parliament alone and not for them.

The paragraph therefore provides for the CDC to have the option to restructure and possibly go offshore without liability to UK tax provided that its central management and control had moved offshore by the expiry of the exempt period and not thereafter. This aims to maintain the level playing field which we are seeking to create for the CDC. The mechanism set out would provide for an orderly transfer without providing scope for tax avoidance.

Paragraph 4 deals with groups of companies. It is designed to prevent tax avoidance by preventing other members of CDC's shifting assets into CDC to avoid tax.

Paragraph 6 on distributions provides that dividends should be treated as if they were coming from an overseas company. This is to prevent investors benefiting from provisions designed to prevent double taxation of company profits, first, in the hands of the company and, secondly, as distributions from those profits in the hands of the shareholders. That would not be appropriate because CDC's profits are exempt in the company's hands.

I understand that the noble Baroness wishes me to comment on her Amendments Nos. 5A and 5B before she speaks to them. Amendment No. 5A would have the effect that CDC's tax exemption would be dependent on the special shareholder being satisfied that the investment policy and business principles had been adhered to. I agree entirely with the thinking behind the amendment. We want them both to be firmly entrenched and adhered to, but we do not think that it is appropriate that this should be done by an amendment to the provisions on tax exemption.

All the advice we have received is that the partnership should be designed in such a way that there is no possibility, and no appearance of any possibility, of ad hoc government interference in the day-to-day functioning of CDC, and that all our requirements should be set out in the partnership documents so that investors have clear knowledge of what they are investing in. We would not wish to allow political discretion, or the appearance of it, over CDC's tax liability, which would 1194 be the effect of Amendment No. 5A. The special share is the right instrument for protecting and enforcing the investment policy and business principles.

The articles of association contain provisions for the investment policy in Article 51, and for the business principles in Article 52. These are entrenched in the articles of association and can be changed only with the consent of the special shareholder, the Secretary of State. That in turn requires the approval of Parliament. The content of the investment policy and the business principles is also protected. For investment policy, no change could be made without the approval of the majority of the ordinary shareholders and the consent of the special shareholder.

The mechanism for changing the business principles is different. Changes to the business principles could be made only by a majority of CDC's board, that majority to include at least three of the four members of the business principles committee, which is set up to monitor operation of the business principles and review their content and make recommendations to the board. The two directors appointed by the Secretary of State will sit on this committee, which means that at least one of them would have to have voted in favour of the change before it could be agreed.

I hope it will be accepted, therefore, that both the investment policy and the business principles, to which the amendment refers, are already enshrined in the articles of association under the Bill, and that it is better for them to be protected in that way than through an amendment to the tax exemption provisions.

Amendment No. 5B would change "seventh" to "tenth" in the period in which Section 66 of the Finance Act 1988 is disapplied so that CDC could shift its assets offshore. In order to go offshore, a company incorporated in the United Kingdom would normally set up a company outside the UK, in a country with a suitable tax regime, transfer its assets to it and then effect a merger into that offshore company. Because of the nature of CDC's assets, held in a large number of overseas jurisdictions, it could take CDC several years to do that. I imagine that that is what is behind the amendment. But it would not be appropriate to encourage it to be doing so during the partnership, and if it waited to commence the process until after any redemption of the special share there could be a period in which it was exposed to UK tax. So far, I think, we have everything in common.

The proposal is that a rule which says that a company incorporated in the UK is UK resident for tax purposes, under Section 66 of the Finance Act 1988, should be disapplied to CDC for a period of seven years after the end of the exempt period. This means in practice that CDC could initially go offshore by moving its central management and control offshore. It could then shift its assets in the seven year period during which Section 66 was disapplied. CDC estimates that it would take about three or four months to shift its central management and control. This should happen in the notice period fits redemption of the special share. The seven year period which we proposed fits in with the average life of 1195 CDC's investments. CDC is confident that the seven year period would be sufficient to allow for an orderly transfer.

I hope that that gives the noble Baroness the reassurance that she seeks about the detail of this admittedly complex amendment.