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The Paymaster General (Dawn Primarolo): I shall respond briefly as we had a similar debate in Committee, and I must admit to a feeling of deja vu as the hon. Member for Arundel and South Downs (Mr. Flight) has
Although this may disappoint the hon. Gentleman, I am no more convinced by his amendment than I was in Committee, even though we have had extensive discussions. Towards the end of his remarks, he referred to three aspects on which there was a meeting of minds in Committee: charities, pension funds and whether the operation of section 13 of the Taxation of Chargeable Gains Act 1992 is harsh. Particular discussion centred on the Baxi company.
Before I respond on those points, which are the ones on which the hon. Gentleman seeks the comfort of a reassurance given on the Floor of the House, I say to him that the proposals deal with avoidance. In Committee, he agreed that he would not want himself or his party to be associated with activities deliberately designed to allow someone not to pay tax. I accept his point about the amendment, but in the knowledge that there is much to agree on with respect to the broad sweep of the proposals. However, I recognise that the Opposition feel strongly as they have returned to these issues yet again.
As I said in Committee, I have asked the Inland Revenue to review without prejudice the operation of section 13 of the 1992 Act in respect of charities. I have also asked it to consider pension funds, which the hon. Member for Arundel and South Downs also mentioned. I have some sympathy--I would not like to overstate the point--with the view that section 13 may operate harshly in some circumstances, so I have asked the Inland Revenue to extend the remit of the review, again without prejudice, to see whether there is a case for widening the categories of gain not caught by section 13.
May I put out a general statement? People concerned about those matters, including the hon. Gentleman, will have the opportunity to make their points to the Revenue. I take a great deal of pleasure in my correspondence with him, and I am sure that the Revenue will do likewise. I shall consider carefully the points arising from the review and there is no reason why there should not be further correspondence at that time. I trust that my remarks have helped to allay the fears expressed by Conservative Members and that they will withdraw the amendment and await the outcome of the Inland Revenue's considerations.
Amendment made: No. 90, in page 482, line 5, leave out--
', in subsections (1), (3)(a), (4), (5), (7) and (8), after "sections 86A to 96"'
and insert "--
(a) in subsections (1), (3)(a), (4) and (7), after "sections 86A to 96", and
(b) in subsections (5) and (8), after "sections 86A to 90",'.--[Dawn Primarolo.]
7A.--(1) Amend section 799 of the Taxes Act 1988 (computation of underlying tax) as follows.
(2) In subsection (1) (underlying tax to be taken into account to be so much of the foreign tax on the relevant profits as is attributable to the proportion represented by the dividend) after "as" insert "(a)" and at the end of the subsection add ", and
(b) does not exceed the amount calculated by applying the formula set out in subsection (1A) below."
(3) After subsection (1) insert--
"(1A) The formula is--
D x M
(100 - M)
D is the amount of the dividend; and
M is the maximum relievable rate;
and for the purposes of this subsection the maximum relievable rate is the rate of corporation tax in force when the dividend was paid."
(4) In subsection (3) (profits by reference to which underlying tax to be taken into account is calculated)--
(a) at the end of paragraph (a) insert "and";
(b) omit paragraph (b); and
(c) in paragraph (c), for "paid neither for a specified period nor out of specified profits" substitute "not paid for a specified period".
(5) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom unless the dividend was paid before that date.
(6) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.
Dawn Primarolo: I have not moved the amendment formally because it is necessary to comment on the double taxation relief issues before the House. I recognise that the hon. Member for West Dorset (Mr. Letwin) is not
The amendments will change the system of double taxation relief for companies in order to reinforce the Government's policy of removing the tax advantages that the biggest multinationals get from using offshore companies to route dividends into the United Kingdom. At the moment, that enables them to avoid UK tax on profits on which little or no tax has been paid elsewhere, and to avoid the impact of the legislation on controlled foreign companies--a matter that we will come to subsequently.
Most of the provisions introduced by the amendments are new. Some, however, are a reordering of amendments that were agreed in Standing Committee; they need to be repeated because of the other changes that we are making. I turn specifically to the new proposition in the Government amendments, which basically deals with onshore mixing. That brings me to new sections 806A to 806K. I shall mention briefly what they do.
The Inland Revenue has produced a very detailed explanatory note with dozens of worked examples. To make this aspect of very complex legislation as clear as we possibly could, the Government thought that it would be helpful to have a full explanatory note for business and, indeed, hon. Members to refer to. The Inland Revenue will publish further detailed guidance about the legislation later this year, well in advance of when the legislation starts to apply at the end of March next year.
New sections 806A to 806G allow underlying tax that is excluded by the 30 per cent. mixer cap, or that cannot otherwise be allowed in the UK, nevertheless to qualify for credit relief, subject to an upper maximum limit of 45 per cent. That will effectively prevent low-taxed profits from being mixed with high-taxed profits, while still allowing relief for foreign tax paid at rates of up to half as much again as the UK rate.
A rate of 45 per cent. is generally above the main corporate tax rates in, for example, virtually all the European Union, the United States and a very large number of other countries, which I am more than happy to read into the record if hon. Members wish. However, I do not think that they would wish me to do that, so I will use just those examples.
The proposals would remove the tax advantages of holding overseas subsidiaries through offshore holding companies. They prevent avoidance of UK tax on low-taxed profits from controlled foreign companies by the current practice of mixing them with high-taxed profits earned by different companies in different countries. They stop the UK giving unlimited relief for foreign tax paid at rates well in excess of the UK rate, while nevertheless giving companies scope for obtaining relief for foreign tax paid at rates that are up to half as much again as the UK corporate tax rate. They introduce more flexible forms of relief than UK companies have enjoyed before.
The old system of mixing offshore was extremely complex. Dividends had to be timed perfectly. One had to have the right dividend in the right place at the right time in the right year in the right amount. The mixer system was very complicated and entirely artificial. We are putting in place a system whereby new companies investing overseas will in future have a new system that
Some companies already investing overseas have complicated structures. If they want the maximum benefit from the arrangements, they will need to restructure. In the Financial Times today, the Chartered Institute of Taxation said that the compromise was "generous and flexible". Hallelujah! Peter Cussons, partner of PricewaterhouseCoopers, said of the proposals, "90 per cent. there," although he would have liked to have seen the cap set a little higher, but he would say that, wouldn't he?
I think the House will agree that the arrangements that will be in place following all the changes in the Finance Bill on double taxation relief, on capping and to prevent offshore mixing, and the arrangements for onshore mixing give a sound basis to move forward in this policy area. I commend the amendments to the House.