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Mr. Jack: Could the hon. Gentleman assist my memory by citing either the document or the paragraph in a document in which the clause was the subject of detailed scrutiny and consultation?
Mr. Beard: The document in which that appears is the Finance Bill, and it is also in the explanatory notes. There has been wide consultation. As my hon. Friend said, nobody who had considered the Inland Revenue document on double taxation relief for companies and other documents over a period of 18 months could have been unaware that such an issue would arise. My hon. Friend has outlined the discussions that have taken place in recent weeks and months.
When Mr. Troup gave evidence to the Select Committee on the Treasury, he said that he believed that there was mischief involved in mixer companies, yet he has been quoted as though he were antagonistic towards the Government's proposals.
Mr. Quentin Davies: Did the hon. Gentleman pay attention to the speech of the Paymaster General, whom he is now so gallantly trying to defend? If he did, he would have noticed that she cited a whole range of documents, newspapers, tax experts and some Inland Revenue documents, but not a single Government document that referred to the possibility of abolishing mixing relief.
Mr. Beard: My hon. Friend was at that point quoting the people who had been consulted, and their responses.
She was therefore not likely to quote a Government document that outlined what had already been said. [Interruption.] The hon. Member for West Dorset has spent most of the evening convulsed with amusement. I cannot see that the joke is other than on him for having made such a to-do about something, when the nearest he has come to any serious purpose has been to talk Britain down. That seems to be the hallmark of those on the Opposition Front Bench. The hon. Gentleman spoke with some satisfaction about the number of companies that will be transferring their headquarters from Britain. He seemed to delight in talking Britain down. Earlier, he regaled the Committee with his own qualifications. If those qualifications are to be used to prop up his arguments, perhaps he should use those arguments to a more constructive end than trying to destroy a policy that is in the country's interests.The other allegation that the hon. Gentleman made was that the purpose of the measure was uncertain. As has been said, one purpose is to secure a fairer share of tax revenues for the United Kingdom, by more effectively limiting the relief available for foreign tax paid. There is no doubt that countries that maintain higher rates of tax revenue do so under the mixer arrangement at the expense of United Kingdom taxpayers. It is a strange party that, in the European debate, talks of sovereignty and of foreigners taking our sweets off us, but is willing to tolerate such a position on tax being refunded to the UK.
Mr. Beard: I will give way in a moment, but I wish to continue with my list.
The pretence was that there was no purpose in the provision and that it was there merely to damage the United Kingdom, or almost; it was the red saboteurs--the parliamentary equivalent of the ones outside. That was the level of the speech, and it needs knocking.
Another argument, which must be taken seriously, is that the present arrangements cause a distortion in group structures. Many companies are induced to have these pseudo-subsidiaries--the mixer companies--when they do not need them for any management purpose. There is no reason in logic, business or taxation why we should give preference to that sort of grouping, arriving at one sort of arithmetic, compared with the direct refunding of profits under the system that is proposed.
Those distortions carry through to the investment decisions that British companies are taking. The tax system ought to be neutral in that respect. It ought not to be perverting investment decisions so that they go one way rather than the other, but that is one of the impacts of the present arrangements that my hon. Friend the Paymaster General discussed.
Mr. Letwin: Does the hon. Gentleman agree that it would be of some advantage to the United Kingdom if it had a regime that was sufficiently competitive to enable some multinationals to be headquartered here so that they paid some tax here? Does he recognise that I was maintaining a certain level of humour because had I not done so, I might have expressed the anger that some of us feel about a measure that, because it is so misguidedly
trying to raise revenue, will have a lasting negative effect on the UK economy, which neither this Government nor their successors will be able to remedy for decades.
Mr. Beard: The position that I detect from the hon. Gentleman's theme is similar to the one he adopted when he dealt with the previous theme--indeed, it resounds through the Opposition. It is to be on the side of anyone who is relieving businesses and other people of tax. In this case, we are seeing a last-ditch stand to defend a Government of 20 years who were lax on the tax system against a Government who have come in and are trying to put it right. The indignation of the hon. Gentleman and many of those who are complicit in the exaggeration of the impact of these measures is well summed up in, I think, George Bernard Shaw's aphorism that there is nothing more indignant than a vested interest masquerading as a moral principle.
Mr. Dorrell: I begin by declaring an interest as a director and shareholder of a company that operates with foreign subsidiaries, some of them held through intermediate holding companies. I have some personal involvement in this issue.
I congratulate my hon. Friend the Member for West Dorset (Mr. Letwin) on a skilful presentation of the case. The issue is important because of its possible impact on tax revenues. It is much more important because of the disincentive that it introduces into our tax system for large multinational companies to locate their head office functions and, importantly, intermediate head office functions on UK soil. So, for all the reasons advanced by my hon. Friend, I hope that the Government will withdraw this proposal, reconsider how to set about the taxation of foreign dividend flows into the UK and undertake a proper consultation on whatever proposals for legislation they then introduce.
9.45 pm
We all know that some anti-avoidance legislation needs to be introduced without consultation so that its effect is not nullified by people acting in advance of the effective date of the new law. However, the Government realise that this proposal is not one such. Today, they announced that the effective date of the new law is to be delayed until March next year, so there is no need to proceed without proper consultation on the proposal.
It is crystal clear that there has not been sufficient consultation on the precise implications of the Government's proposal. Given everything that has been said, it is incumbent on the Government to reconsider the matter. They should then hold proper consultations on their precise proposals for legislation. I hope that that is the lesson the Government will draw not only from this debate but from the wide public discussion of this badly thought out proposal.
Mr. Letwin: My right hon. Friend speaks with the authority of a former Financial Secretary to the Treasury. Does he agree that if there is an abuse such as that which has been identified on transfer pricing or cross-lending from low-tax subsidiaries, the appropriate method for dealing with it would be the onshore pooling that was the
subject of the consultation paper? There is a means to deal with any feared avoidance of that type; the Treasury could go back to that.
Mr. Dorrell: I agree with my hon. Friend. Given the choice between the offshore mixers that have developed and onshore pooling, I should have a strong preference for the latter. One reason for that is because the one point made by the Paymaster General with which I agreed was that the combination of the controlled foreign companies legislation and offshore mixers is a genuine abuse. The Government are on strong ground if they want to address that aspect of the problem. However, their difficulty is that in dealing with that genuine abuse, they have created a much bigger problem than the one they set out to solve.
It is important for the Committee briefly to remind itself that, in an increasingly globalised economy, not only huge multinational companies but a broad range of British companies have foreign operations in various parts of the world, trading under tax regimes whose rates are different from those in the UK. The question the Committee must address is whether British-based companies which earn profits in other parts of Europe or the world--including the developing world--and pay tax in those countries at rates determined by their national Governments, should, if the management choose to bring the after-tax profits back to the UK as dividends, pay an extra tax yield to the UK Exchequer.
Some countries--Holland is a major one--make no claim whatever to tax dividends from earnings that are fully taxed in overseas territories. In a globalised economy, a strong case can be made that, if revenues have been taxed overseas, the repatriation of those revenues to the host country as dividends should lead to no further taxation obligation. That is the Dutch position.
The traditional UK position has been that we claim to tax those flows, but we make that claim only if the average rate of tax paid overseas is lower than that paid in the UK. That has been the effect of the mixer company.
What the Government have now moved to--uniquely among 67 countries, as my hon. Friend the Member for West Dorset rightly said--is the proposition not that we should allow that averaging process to take place through mixer companies, but that any British-owned company that earns revenue anywhere in the world, pays tax to the appropriate national Government at the rate that that Government deem sufficient and then repatriates the revenue to the UK ought to pay a marginal tax rate to the UK Exchequer if the tax paid where the profit is earned is lower than that set by the UK Government. I do not believe that that is correct as a matter of principle, but if the Government insist on legislating for such an arrangement it will be hugely damaging to the UK's role as a command control tower for international companies operating in different parts of the world.
There has been a long discussion in the newspapers--we have heard more of it this evening--about whether the tax yield will be £175 million, as the Paymaster General said, or £3 billion, as PricewaterhouseCoopers has suggested. I draw two conclusions from that argument. First, as the hon. Member for Kingston and Surbiton (Mr. Davey) said, it underlines the case for a proper consultation. It is absurd that we can be discussing the
introduction of a new tax law when we, the people's representatives, do not know whether the effect will be to bring in £175 million or £3 billion.To be honest, the second conclusion reinforces the Government's position rather than some of the things that my hon. Friend the Member for West Dorset said. I simply ask myself what course of action the management of a company are likely to take when faced with a choice between bringing earnings from the place where they were earned back to the UK, and therefore paying a substantial tax bill to the UK Exchequer, and taking those earnings to an intermediate holding company in some other country where they will not have to pay tax. It seems overwhelmingly likely that unless the revenue is essential for paying further dividends to UK shareholders, companies will choose to take the revenues to overseas holding companies. That will not produce a huge tax revenue to the UK.
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