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Mr. Jack: Before my hon. Friend departs from the point about foreign jurisdictions, will he note that in response to a parliamentary question that I tabled to the Paymaster General, inviting her to put on record what information the Treasury had about foreign tax jurisdictions in this context, she was unable to supply any?

Mr. Letwin: I am grateful to my right hon. Friend. I had noticed that. That is why later I shall supply the information for the Treasury; I think that he is already in possession of it. If it had looked into the matter, I am sure that it would have discovered what the Inland Revenue already knew. As the Treasury was introducing a measure, the opposite of that which the Inland Revenue had been consulting about, it is quite possible that it did not want to ask the Inland Revenue what the effect of the measure that the Inland Revenue thought that it was not introducing would be if it were introduced.

The Association of Corporate Treasurers tells us that the announcement on 21 March

of the sweeping and fundamental changes to the double tax relief . . . system took the entire business community by surprise . . . these changes reduce the UK's competitiveness as a base for multinationals . . . The suddenness of the change and its fundamental nature is extremely disconcerting.

I do not know whether the association is also regarded as a dangerous group of lunatic capitalists, but the Chartered Institute of Taxation really cannot be put into that category by the Paymaster General. She spends most of

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her time in the House of Commons telling us how she will close loopholes, apparent loopholes or what seem to her to be loopholes, that will destroy other sections of British business, on the ground that the institute has told her to do so. The institute, her favourite body, tells us:

In the discussion paper dated March 1999, and in discussions with the Inland Revenue International Division--

that is an important point in itself because it mentions not just the paper but what was said after it was issued--

the impression was given that offshore mixer companies were accepted and that, indeed, some form of onshore pooling was being considered. In the event, the proposals go in the opposite direction. This calls into questions the bona fides of the consultation process and the way in which the Revenue and the Treasury work together in relation to taxation policy decisions.

We have begun to hear what will be the prolonged murmur of companies that are thinking of re-siting their headquarters away from the UK. Zurich Allied cited its reasons a few days ago; today, it is SmithKline Beecham. Whatever the Paymaster General may care to do to an innocent partner of a major accounting firm when he raises the truth, I doubt that even she will want to assert that those companies, which between them employ thousands of people in this country, are to be neglected, ignored or abused. We have the seeds of a serious malaise in our economy; they have been sown by a provision that is unheralded and unannounced, and about which there was no effective consultation.

Why did it happen? Part of the reason, probably, was that the Inland Revenue was genuinely and honestly moving in an entirely rational direction. From what we can gather, an economic adviser in the Treasury then had a bright idea. It was suggested to Ministers that they could make a large amount of money very easily and quickly from a source that had not been the subject of the initial levy when the Government first came into power, but which was mighty rich. The Ministers were told that it would never be defended in public because no one would have the gall to do so. That was because the source was nasty capitalists coming from abroad called multinational companies. I think that that is what happened.

Was the process by which it happened respectable? No, it was not. I have dealt with that already. Regardless of the merits of the measure, the process was disreputable. Much more important is the question whether it is substantively tolerable. What are the Government's arguments for taking £3 billion, £3.5 billion or £4 billion a year off the multinationals that are headquartered in the UK, and do they stand up to scrutiny? The first argument is that the figures are all wrong, and unfortunately that argument is right, but it backfired. As I have pointed out, the figures that are wrong are those of the Government, and the measure makes a huge hit on the multinationals headquartered in Britain.

The second argument has not been made here, but I suspect that it has been made in some quarters in the Treasury, and it is rather more ingenious. The hon. Member for Kingston and Surbiton (Mr. Davey) will enjoy this argument, which is parallel to some of those used during the proceedings on the Government Resources and Accounts Bill. It runs as follows: multinationals currently headquartered in Britain are shackled by the ingenuity of the capital gains tax arrangements because they cannot move their headquarters abroad without crystallising a huge capital gain arising from the difference between the historic cost

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of the subsidiaries that they have acquired and their current market value. We can therefore sting them for £3 billion, £3.5 billion or £4 billion because they will not be able to leave these shores and we will not suffer the adverse effects that would be caused by their doing so.

That is a curate's egg of an argument--some parts are good and other parts are not so good. The bit that is good is that it is true. The ingenuity of the capital gains tax system means that existing multinationals with old acquired subsidiaries are shackled to this country. That is not an unusual arrangement; most countries have it. Those companies cannot get out because if they tried to do so they would have to pay the Chancellor a whopping bill--which would probably be greater than the one that we are discussing--all at once, and he would be a happy man. He could put away another several billion pounds to pay off national debt or to spend on the national health service, a choix.

There are two slight problems with the argument. The first is that not all the major multinationals acquired their subsidiaries and assets abroad long ago. Some, such as Vodafone-Mannesmann, have recently acquired massive overseas subsidiaries. I pose as no expert on these matters, but it is not clear that they are shackled to this country. Vodafone-Mannesmann is the biggest company in Britain, the biggest company quoted on our stock market and the most important single element of the very market that the stock exchange today conjoins with markets in Frankfurt and New York.

If the measure is passed, the company might move its headquarters abroad, and if it did, what would go with it? All the lawyers, accountants and consulting engineers, all the people in the City and all those who service all those people, from tea to printing, would lose out. We are not talking about thousands, millions or tens of millions of pounds; we are talking, over time, of hundreds of millions of pounds of economic value that will be lost to this country.

Mr. Howard Flight (Arundel and South Downs): Billions.

Mr. Letwin: In the long run, as my hon. Friend says, we could lose billions of pounds.

The second slight problem concerns all the companies that are not yet headquartered here. I have personal experience of this matter, because at one stage I was restructuring INTELSAT, a satellite organisation that involves all 137 countries of the world. The question arose of where the organisation should locate the headquarters of its new privatised spin-off. The most extensive search was performed, ironically by Pricewaterhouse, on behalf of INTELSAT, to identify the countries where multinational companies would most like to have their headquarters. The two that came top of the list were the UK and the Netherlands.

What would happen today? The UK would be at the bottom of the heap. For that reason, if clause 102 is passed, an intangible and unquantifiable economic value will be lost over the years because companies that would have brought their headquarters here will not do so. They will go to the Netherlands or other countries. The idea that the measure will have no real effect because companies are shackled is just true enough to be deeply misleading.

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There is a third argument, which Ministers have used and to which my right hon. Friend the Member for Fylde alluded a moment ago. Ministers have tried to claim that we will have a highly competitive regime even after clause 102 has been passed. I am not now suffering from the selective amnesia to which, regrettably, my right hon. Friend and I are subject, because I was able to find this point in Hansard. On 17 April, the Paymaster General said:

when we compare how we tax our multinationals and, in particular, the use of our controlled foreign company legislation, with the practice of our European partners--

she may be thinking of places where there are many company headquarters such as Luxembourg or the Scilly Isles--

we find that the Government's proposals are to bring us into line with the competitive practice of other countries.--[Official Report, 17 April 2000; Vol. 348, c. 758.]

I mention the Scilly isles because the proposition is absurd. The USA has onshore pooling and uses a general basket of offshore credits. Japan has onshore pooling via a worldwide basket. Canada exempts dividends from trading activities worldwide. France and Germany exempt 95 per cent. of dividends from significant shareholdings. Italy does likewise, but only within the EU, although that is changing in 2001 and the exemption will be universal.

Of the G7 countries, the UK, under clause 102, becomes the only one that does not have onshore pooling or exemption as a way of achieving the same effect. The Paymaster General brilliantly exposes us to be the sole candidate to be at the bottom of the heap, the one country that companies would want to avoid if they were seeking to site their headquarters in a major economy.

I do not know what the Paymaster General thought that she meant when she said:

when we compare how we tax our multinationals . . . we find that the Government's proposals are to bring us into line with . . . competitive practice,

unless she thinks that bringing us into line with competitive practice means ensuring that we are last in the race. If that is the hon. Lady's general notion of how the UK should be competitive, we have grounds beyond the clause to worry.

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