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Dawn Primarolo: I shall begin by responding to the hon. Member for West Dorset (Mr. Letwin), who broke the embargo on information that we forwarded to the Liberal Democrat and Conservative spokespersons in order to keep those on the Front Benches fully informed of the Government's thinking on the matter.

When the Finance Bill was published, it was announced that there would be further consultation on clause 102 between then and 19 April. Given that the debate had been called for this evening, it seemed appropriate to inform the House at the earliest opportunity of the Government's decisions in their consultations with industry. When I have dealt with that, I shall return to some of the points that the hon. Gentleman made in his opening remarks.

On Budget day two years ago--

Mr. Quentin Davies: Will the hon. Lady give way?

Dawn Primarolo: I want to set out the argument, then I shall give way to the hon. Gentleman. When the Government try to ensure that representatives of the

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Opposition Front Benches are kept fully informed on an important issue, it is not helpful when that is used as a debating point at the Dispatch Box.

Mr. Davies rose--

Dawn Primarolo: With all respect to the hon. Gentleman, no, I shall not give way.

Mr. Letwin rose--

Dawn Primarolo: I am not sure which part of the word "no" the hon. Member for Grantham and Stamford (Mr. Davies) and his hon. Friend are having difficulty with. It might be the N or the O. I shall not give way until I have responded to the points made by the hon. Member for West Dorset.

On Budget day two years ago, the Chancellor announced that the Inland Revenue would carry out a review of the UK's system of double taxation relief for companies. That would involve a review of the functioning and the fairness of the existing system, its effectiveness in meeting the objectives of the relief, and business compliance costs, while having regard to the overall cost of the relief. I shall return to the question of cost.

Following extensive consultation with business, the Inland Revenue published a discussion paper on Budget day last year. Comments were invited by 30 September on the matters discussed in the paper and on other issues concerning double taxation relief. The Government carefully considered the points that were made by business, tax advisers and representative bodies during the review. Our decisions, together with draft legislation giving effect to them, were published on Budget day this year. A further period of consultation was allowed and we invited comments.

I note that the adviser to the Chancellor of the Exchequer under the previous Government, Mr. Troup, when giving evidence to the Treasury Committee on the double taxation changes, welcomed them. If hon. Members want chapter and verse for his remarks, I shall be happy to provide it.

9 pm

Having undertaken the consultation, the Inland Revenue and the Treasury have had a number of meetings with companies, tax advisers and representative bodies, such as the CBI. The Inland Revenue has addressed meetings that have been well attended, and a number of individual companies have discussed with the Treasury and the Inland Revenue how the double taxation relief changes will affect them. I cannot name them for reasons of confidentiality. To do so would mean identifying companies that have been using mixer companies in order to reduce their UK tax on low-taxed profits, or that have been planning to do so. The Inland Revenue and the Treasury have also received a number of letters from tax advisers and representative bodies.

The Government have taken on board all the comments and have made the following decisions. It has always been the Government's intention to allow companies a period in which to bring dividends to the UK and to claim relief for the underlying tax under the old rules. That is why the draft legislation provides for a start date of 1 July. Several

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companies have asked for a longer period. They have pointed out, for example, the difficulties with minority shareholders in foreign subsidiaries, or with foreign restrictions on when dividends can be paid. The Government do not want those companies to be disadvantaged compared with others that do not have the same problems. They have therefore decided that the restriction on the relief for the underlying tax should come in from 31 March 2001.

Secondly, the schedule provides that, if a double taxation agreement expressly rules out credit relief for foreign tax, relief cannot be claimed under UK domestic law either. The amendment that we are making will ensure that provisions apply only in the case of future arrangements.

The provision that clarifies how relief for underlying taxes is allowed when a group of companies is taxed as a single entity in another country will be amended so that it applies whenever the foreign group of companies is in the ownership chain below the UK company and not just, as the draft legislation allows, where one of the companies in the foreign group is owned directly from the UK.

Finally, except in cases of abuse, the restriction of the amount of underlying tax for which relief may be claimed will not apply where the company that pays the dividends and the company to which it is paid are resident in the same country.

The Government remain committed to stopping the use of mixer companies to avoid UK tax on low-taxed foreign profits. The change extends the period for paying dividends into the UK under the old rules. The CBI welcomes those changes and will say so publicly. The Government have listened and discussion will continue.

Mr. Letwin rose--

Dawn Primarolo: I wish to put the record straight with regard to the points made by the hon. Gentleman on consultation, cost, what has been advised on the consultation period and what we are doing with regard to the totality of the changes. When I have answered his initial questions he may intervene.

The Opposition want to focus on one small measure, but that is part of a package of double taxation relief measures, which, in many areas, gives businesses exactly what they asked for. The relief for foreign tax has been extended when overseas companies merge, allowing foreign tax to be carried backwards and forwards for use in another year. The Government have legislated for a number of practices to improve transparency and certainty with regard to relief. Other changes undertaken by the Government--the reduction in the corporation tax rates, the extension of group rules for losses and chargeable gains, the abolition of stamp duty on intellectual property, the consultation on tax relief for the cost of purchasing goodwill, the consultation on rollover relief for gains on disposable substantial shareholdings--have all been welcomed by business.

The accusation that the change to double taxation relief will make the United Kingdom uncompetitive does not stand up. Double taxation relief is only one consideration that companies take into account when they decide where

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and when to set up their groups. The changes to double taxation relief need to be considered with the other elements in the package.

Let us consider the proposals on mixer companies and the controversy that has grown around them, especially on the Opposition Benches. The Government regard it as wrong that a group that holds overseas investments through an offshore holding company--and is therefore able to mix its subsidiaries' high-taxed and low-taxed profits--should able to obtain more foreign tax credit relief than if it held its investments directly from the UK.

The new rules will secure a fairer share of tax revenues for the United Kingdom; remove distortions in group structures, as groups will not be able to obtain more relief for foreign tax by adopting one structure rather than another; and remove distortions in investment decisions, as groups with low-taxed profits will be in the same position.

The previous Government knew all about those distortions. They acted in 1996 to prevent specific actions.

Mr. Letwin: Will the Paymaster General give way?

Dawn Primarolo: I shall not give way to the hon. Gentleman until I have answered his first series of points.

As soon as the previous Government shut the gate on artificially generated high-taxed profits, the avoidance industry was at work encouraging people to generate artificial low-taxed profits. In October 1998, in the full knowledge that the review of double taxation relief was in full flow, one adviser wrote an article in Accountancy, in which he referred to


The writer expressed surprise that the take-up rate for such holding companies among UK multinationals was substantially less than 100 per cent. He noted that many groups earned most of their overseas income in high-tax jurisdictions. How, therefore, could a mixer system help them? The writer had the answer. He advised:


It is sad to say that we have evidence that some of the loudest opposition to the provision on mixer companies comes from companies that took that particular tax planning advice.

The Government have decided that such tax-driven distortions, which generate artificial high-taxed income one year and artificial low-taxed income the next, should no longer be a feature of the system. The new rules will also level the playing field between groups that have mixers and those that do not.

The current rules have the unintended effect of allowing other countries that maintain high tax rates to secure more tax revenues at the expense of UK taxpayers generally. They provide a subsidy from the UK to high-tax regimes.

The change will also make the UK's controlled foreign companies rules work better. The rules are designed to prevent multinationals from avoiding UK tax by diverting

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profits to companies in tax havens and preferential regimes. Companies are exempt from the CFC rules if they pay back at least 90 per cent. of their profits to the UK as dividends. The assumption behind the exemption is that UK tax will be paid on the dividends and so there is no need to apply the CFC rules. However, mixing means that UK tax is often not paid on the dividends.

I cannot do better than to quote from an article published in the September 1998 edition of International Tax Review. It refers to mixer companies and says:


The far-sighted writer of that article was from PricewaterhouseCoopers.

The Opposition have said that we did not consult properly, but business has known all along that mixer companies were being considered in the review. It cannot possibly have been under any illusion that that was not the case. The matter was freely discussed at meetings, as tax advisers and the Inland Revenue have said. To confirm that, in September 1998, an article in International Tax Review speculated that an outcome of the review of double taxation relief would be restrictions on the use of mixer companies. It stated:


Guess which company the far-sighted writer of that article came from--PricewaterhouseCoopers.

Mixer companies were dealt with in the discussion paper that the Inland Revenue published 12 months ago. It identified all the issues that the Government have taken into account in announcing the change and noted that


It stated that the principle of mixing


and added that mixing


As the hon. Member for West Dorset said, the paper concluded that mixer companies


The Government believe that the changes have achieved that balance.

In July 1999, the Inland Revenue ran a workshop for business on double taxation relief. The hon. Gentleman sought to ridicule and undermine that consultation process, but many supportive letters on the approach that it had adopted were received. One person wrote that he would recommend the Inland Revenue to extend the approach to other areas of taxation under review. Another wrote that the workshop provided an excellent format for taxpayers to understand the Revenue viewpoint and to express their own views.

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In 1999, the writer of an article in Tax Planning International Review said that an


Hon. Members might think that views have changed since then, but that point was repeated by a different commentator in Accountancy Age on 30 March this year--after the Budget announcement. In September 1999, the chairman of the CBI tax committee told the Treasury that the review had been extremely well organised and that the CBI had felt able to participate in a full and meaningful way. As I have said, it will welcome the changes that the Government have announced.

I shall deal with the points about the Red Book, the calculations, whether the Revenue's figures are wrong and whether there is a dastardly plot in the Treasury. The total net yield from the double taxation relief changes is estimated at £100 million in a full year. The yield from the restriction on the use of mixer companies is estimated at £150 million to £175 million in a full year. I shall explain how the Revenue achieved that forecast; the hon. Gentleman is right that nothing is perfect, but it cannot be far off.

The Inland Revenue identified 1,000 groups that claim relief for underlying tax. About 600 do not use mixer companies and so are unaffected by the change because they hold their subsidiaries direct from the UK or do not have low-taxed profits on which they want to avoid UK tax. Half the remaining 400 have mixer companies whose purpose is to mix high-taxed and low-taxed profits on their way into the UK.


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