§ Mr. BurnsTo ask the Chancellor of the Exchequer if he will make an announcement about the outcome of the consultations between the life assurance industry and his officials about the taxation of United Kingdom branches of overseas life companeis authorised in his 1991 Budget.
§ Mr. DorrellInsurance industry representatives and Inland Revenue officials have held a series of meetings and significant progress was made. I am grateful to the Association of British Insurers for its constructive approach in these discussions.
Legislation in recent years has made major changes to the taxation of life insurance companies. Overseas life offices operating in the United Kingdom through branches need adaptations of the recent reforms to meet their special circumstances. But there are other equally important reasons for reforming the rules under which these United Kindom branch operations are taxed. First, many such branch operations presently have the major part of their taxable investment income determined by reference to apportionment rules which have changed little since the first world war. For a number of reasons, these have become increasingly inappropriate as a basis for measuring United Kingdom branch income. Second, in a 285W number of respects, the current rules under which they are taxed lead to disparities of treatment as against the United Kingdom resident life offices. Some of these presently work to the advantage of the United Kingdom branches; others do not. Our goal is to ensure that, as far as possible, United Kingdom life offices and the United Kingdom branch operations of foreign life offices are able to compete for United Kingdom business on terms which are not distorted by tax considerations.
The main proposals are as follows:
the present apportionment rules in section 445 of the Income and Corporation Taxes Act 1988 will be repealed. The branch income, gains and expenses will instead be ascertained as a matter of fact. The normal rules for measuring the taxable profits of a United Kingdom branch operation in section 11 of the ICTA 1988 will apply to all categories of life insurance business, but with two modifications to reflect the unique characteristics of life and other long term insurance business;—where the assets held by the branch to back the life insurance policies it administers are less than the assets which a United Kingdom resident company with the same portfolio of policies would be expected to hold, income from, and gains on, assets which are held outside the branch will enter into the computation of branch profits. For the purposes of this comparison the United Kingdom branch will be treated as though it were a distinct and separate enterprise dealing at arm's length with the other parts of the company. The assets to be attributed will be those which have a particular connection with the United Kingdom branch activities. If the value of any such assets is insufficient to support a fair comparison between the United Kingdom branch and a United Kingdom life office writing the same business, a proportion of the worldwide income and gains of the overseas company will also be brought into charge to United Kingdom tax;—the scope of Section 11 of the ICTA 1988 will be extended so that gains on assets situated outside the United Kingdom and used or held for United Kingdom branch purposes will become chargeable gains;—distributions from shareholdings in United Kingdom companies which are held as part of the branch activities will carry an entitlemenbt to tax credit. The overseas company will be able to treat distributions as though they were profits chargeable to corporation tax, against which management expenses and various other deductions can be set;—new rules will enable the necessary figures to be established direct from the company's records where a regulatory return of the United Kingdom branch activities does not provide the information required;—double tax relief will be available for foreign tax paid on the United Kingdom branch income of the company's long term business fund assets.The new rules will apply for accounting periods beginning on or after 1 January 1993. I am today depositing a copy of the draft clauses in the House of Commons Library. Copies are also being sent to each of the companies known to be affected by the new proposals, and to the Association of British Insurers. Further copies are available on request from the Inland Revenue to whom representations on the clauses should be sent by 28 February 1993.