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Mr. Quentin Davies: I remind the Committee of my interests as declared in the Register. As far as I am aware--although I have been almost deliberate in not finding out--the firms with which I am associated are not directly at risk from the Government's proposals.

I congratulate my hon. Friend the Member for West Dorset (Mr. Letwin), the shadow Financial Secretary, on a brilliant forensic devastation of the Government's case, which was suffused with Ciceronian irony. I am sorry that the hon. Member for Bexleyheath and Crayford (Mr. Beard) failed to grasp that, but the rest of us enjoyed it enormously--with the possible exception of the Paymaster General, who was the target of his devastating analysis.

My hon. Friend made a case against the Government on three counts. The first is far and away the most important. The significance of it goes way beyond the issues that we are discussing this evening and the matter of tax law. My hon. Friend brought forth documentary proof, no less, of a matter that several of us have been raising for a long period--since the election. The Government are profoundly indifferent to Parliament and systematically treat it in a disdainful and frivolous fashion, documentary evidence of which can now be seen in the press release, apparently embargoed until 10 o'clock, in which the Government announce a series of changes--including some totally inadequate concessions--on the matter under discussion.

That demonstrates a double contempt of Parliament. First, the press release makes it clear that the Government are not interested in what Parliament has to say on the matter. They had decided the matter and were going to make an announcement this evening, making plain that that announcement could not be influenced by what might be said in our debate. One cannot get much more contemptuous than that.

Secondly, the Government clearly took it for granted that their proposals would be endorsed by the vote in Committee. That is as much--indeed, even more--of an

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insult to Government Members and their docility as it is to the sovereignty of Parliament. We have seen many signs of the Labour Government's insidious attitude towards Parliament and the fundamental responsibility of the Executive branch to be accountable to Parliament. We have not seen before the sort of dramatic documentary evidence that my hon. Friend introduced in Committee this evening, for which we should all be grateful.

Against that background, it is not surprising that my hon. Friend exposed, quite incontrovertibly, the Government's mockery of the consultation process. The Inland Revenue has clear rules for consultation and, apparently, a consultation process on the issue of double taxation relief and corporate taxation was launched. However, at no stage during the course of that proceeding did the Government reveal what they actually proposed to do. Therefore, a mockery of a consultation exercise was held in which all sorts of proposals were discussed except those that the Government intended to introduce in the Finance Bill. That was no consultation at all. The Government underestimate the intelligence of Members of Parliament and the public if they think that they can get away with that.

Mr. Letwin: Does my hon. Friend agree that there is an even more remarkable aspect to the consultation? The final date for responses to the consultation process was, if memory does not deceive, September last year, and the measure was introduced in March this year. Therefore, even if, in the interim, the Government had changed their mind, there were some months in which the consultation exercise could have been repeated, on a new basis.

Mr. Davies: The Government are clearly guilty as charged on this most serious allegation.

The Paymaster General more or less accepted the charge against her when, in her speech this evening, she quoted various speculative press articles that apparently had succeeded in foreshadowing some of the measures the Government intended to present to the House. In no circumstances can a speculative press article be a substitute for consultation. If the Government of this country are in the process of consulting the public on a specific legislative proposal and it so happens, coincidentally, that The Sun, The Mirror or some other publication carries an article about a possible course of action that the Government might adopt, it cannot be argued retrospectively that that speculative article formed part of the consultation process and that those who were engaged in the process were supposed to respond to the speculative press article during their discussions with the officials who took part in the charade.

Mr. Letwin: My hon. Friend reminds me of a point on which I attempted to intervene on the Paymaster General, although, with her customary graciousness, she failed to give way. Does he agree that it was pretty remarkable that, when the hon. Lady quoted one source as having congratulated the Government on their measures after--as she said and as I believe the record will show--the Budget was introduced, she referred to an article published in one of the journals on 30 March? Does he

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agree that it is pretty unlikely that someone could get published on 30 March an article that was written after a Budget that was itself produced after 20 March?

Mr. Davies: My hon. Friend's case is made. During our exchange, there has been complete silence on the Government Benches, and the Paymaster General herself has attempted to hide her embarrassment by sinking her head into her brief.

Our case is a serious one whose importance far exceeds that of any decision that we are likely to take tonight about the taxation of corporations in this country. This evening, we have seen revealed, in all its hideous ugliness, the naked arrogance of Executive power. A low point has been achieved under the Government and the situation gets worse every day, but this evening we have witnessed the most dramatic demonstration yet.

Let me now turn to the substance of the tax proposals before the Committee. One has to start by recognising that there is an apparent anomaly and unfairness in the system of double taxation relief in that, under double taxation agreements, residents of this country are given relief for foreign tax that they have already paid in countries with which we have such an agreement, provided that the rate of tax paid is equal to, or less than, the prevailing rate of tax at which they are assessed in this country, but if they are taxed abroad at a rate of corporation tax that is higher than the rate in this country, they receive no relief for that excess. One might think that that is not even-handed. However, if, under double taxation arrangements, a country were to relieve completely any tax paid under a foreign jurisdiction, it would not only lose revenue, but would be subsidising foreign countries that chose to establish higher rates of withholding or corporation tax, and that would be a perverse thing to do.

10.15 pm

I now come to a technical error that the Paymaster General made in her speech, which pales into insignificance when compared with the constitutional errors that I am afraid she and her Government have perpetrated tonight, but is important. She told the Committee that a system of offshore mixing to secure an average rate of taxation on which relief would be available in this country would itself induce, or provide a subsidy for, foreign countries to tax at higher rates. That is not true. She was confusing a situation in which we relieve all foreign tax with a system of pooling or of mixing, when the tax rates are averaged out.

A British company that establishes an offshore mixing company clearly has an incentive to ensure that the average rate of tax that is incurred is as low as possible. Therefore, it has an interest in resisting investment in countries where the rate of tax is higher. So it is not true that, in an offshore mixing company, the present system--the status quo--creates an incentive or subsidy for foreign countries that tax more highly than we do. I hope that the Paymaster General will think through what she has said because that error may have led her seriously astray in drafting the proposals before us.

Mr. Letwin: Does my hon. Friend agree that it is extraordinary that the Minister who made those remarks

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chairs a committee on so-called harmful tax competition, in which she effectively takes exactly the opposite position--that tax competition is helpful and not harmful?

Mr. Davies: I hope that my hon. Friend is right to say that the Paymaster General views tax competition as helpful and not harmful, because it is essential that, in the European Union or, indeed, generally in the world, we retain some competitive pressure on Governments to hold back their inclination to tax and to spend as much as possible. Tax competition seems to be an extremely benign force. I hope that he is right to say that the hon. Lady is fully persuaded of its importance.

I do not want to sit down without having dwelt on the most important flaw and error in the Government's thinking on the matter. It is a rather naive error to discount entirely the behavioural consequences of such a major change. It does not make the slightest sense to anybody who has had the remotest experience of business life to suppose that one can change anywhere in the world the rules under which multinational companies are taxed without any consequence for their structure or organisation. There will of course be behavioural consequences.

It is not possible for someone who is paid to run the tax department of a major multinational to receive the news that there has been such a significant change and not to recommend to his board any consequent changes in the structure or operation of that company. It is not possible for any director of that company who is doing a proper job for which he or she is paid not to respond to such a recommendation and not to do what rationally is in the interests of the company in the light of the changed circumstances.

It is possible to distinguish between the possibilities that will be open to companies now that the opportunities of running an offshore mixing vehicle are about to be abolished. One would be not to repatriate dividends in order to pay a dividend from a UK company to UK shareholders when necessary, but to borrow instead. That of course implies extremely inefficient cash management and costs that any responsible company would be reluctant to incur. It implies a change in the gearing of that company, which would be resisted by professional managers in any company that is properly managed.

It is fairly unlikely that that course will be adopted. Companies will find ways of not repatriating the dividends at all. As my right hon. Friend the Member for Charnwood (Mr. Dorrell) said, the natural inclination will be to keep those profits offshore and use them to fund other investments. That means that the total dividend flow into the UK will be less than it otherwise would be. I draw the Government's attention to the fact that we have a current account deficit, which is growing. It will grow further if dividends are not repatriated to this country.

Then there are the second-line effects to which my right hon. Friend the Member for Charnwood referred. Companies are accumulating more cash abroad and are making investments abroad. They will increasingly be drawn into setting up administrative structures abroad and perhaps incurring costs abroad, by switching research and development abroad or some other cost that can relatively easily be transferred. That will result in the loss of employment--possibly valuable employment--and the loss of high-value added activities to this country. That is not a good day's work for any Government.

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Finally, what concerns me about the proposal is the opportunity costs. I have not heard that term used once this evening. It seems that the Government have not even considered the opportunity costs. I assume that, if the hon. Lady had asked the Revenue to do a study of them, we would have heard about that this evening in her long apologia. I assume that no one has examined opportunity costs, which are the essence of the matter.

We are speaking about future decisions about the location of investment, the location of headquarters, and the right locus for the incorporation of companies. The debate is being conducted at a time of unprecedented international merger and acquisition activity. As we know, particularly within the single market but not limited to the single market, there have been an enormous number of major mergers between multinational companies. Some have been mentioned this evening. My hon. Friend the Member for West Dorset rightly drew attention to Vodafone Mannesmann, which is the biggest involving this country, and there have also been British Steel and Hoogovens, now called Corus; AstraZeneca; and SmithKline Beecham and Glaxo. In a few weeks, there may be Lafarge and Blue Circle.

There is a list of such enormously momentous acquisitions or mergers in progress. On every such occasion, the decision will have to be taken by the two parties where to locate the new operation, where it should be headquartered, how it should be structured, who should hold the subsidiary companies, and through what vehicle. The Government have chosen this precise moment to make a destructive attack on the attractions of this country as a locus for the headquarters of such emerging multinational companies. There can be no worse incompetence than that.

We have seen an amazing display this evening by the Government, on the one hand of arrogance and abuse of our constitution, and on the other hand of neglect of the fundamental economic duty of the Government to promote a framework in which future investment, employment and growth in this country are maximised.

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