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9.45 pm

Why is the Minister introducing this measure? Why does she want the power to bring in different regulations to apply to different countries? The Minister may say that the circumstances are different, but surely a law should be applied fairly and squarely. Many of us who care about Britain and the high standards that have been maintained here are worried that the Channel Islands will be undermined by the code of conduct that has been introduced. The Minister may remember that she said at the time that the code was not available, but I was able to get hold of a copy. My hon. Friend the Member for West Worcestershire (Sir Michael Spicer) is present, and he will recall that I obtained a copy simply by telephoning Brussels for one.

Will the Minister explain why the Government want the power to bring in regulations that will apply to different places in different ways? The Channel Islands do not belong to the EU, and have always had the right to make their own decisions on taxes. Can the Minister assure the Committee that there is no question that the Channel Islands will be subject to sanctions, and that no pressure will be applied, under the clause, to force them to do something that they do not want to do and that they do not consider in their interests?

Finally, Britain's interest in the EU obliges us all to do many things that we do not want to do. The Minister may remember that we spoke about the Bank of England being forced to sell gold, but the price today is $309 per ounce. The price at which we sold means that Britain has lost hundreds of millions of pounds. Ministers either seem uninterested, or they say that there is nothing to be done.

I know that it would be out of order to go beyond the clause. However, the powers in the clause have never appeared in legislation before. They would allow provisions to be applied differently in different areas. We have treated the Channel Islands in a shameful manner that is against the interests of Britain and the world. The provision is also against the interests of those who believe in maintaining high standards of financial conduct in the financial world.

Dawn Primarolo: I shall begin by explaining the provisions of clause 88. The clause provides for a reserve

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power to make regulations specifying overseas jurisdictions in which controlled foreign companies would automatically fall within the charge to tax made by the controlled foreign company rules.

The aim of the measure is to protect the UK's economic interests and tax base against harmful tax practices where they continue to be prevalent. It reflects the Government's determination to promote fair tax competition and to take effective action where jurisdictions do not remove the harmful features of their tax regimes. It will not be used where appropriate action is being taken by jurisdictions to remove harmful tax practices.

I shall explain the parliamentary process involved and the precedents; finally, I shall explain what will happen next.

Regulations specifying a jurisdiction would require the express consent of Parliament. The regulation-making power is subject to the affirmative resolution procedure, so no jurisdiction can be designated unless and until the House votes through regulations to that effect; only then would the tax rules for controlled foreign companies be affected.

The controlled foreign companies rules are designed to stop UK companies reducing their UK tax liabilities by diverting profits to subsidiaries situated in low-tax regimes. The rules work, broadly, by charging UK parent companies of controlled foreign companies on an amount equal to the profits that would otherwise avoid tax.

At present, there are a number of specific exemptions from these rules that exclude from their effects the vast majority of overseas subsidiaries of UK companies. The measure would give the reserve power to make regulations to exclude from these exemptions companies that carry on business in the designated jurisdiction and would, in effect, bring them into UK tax charge.

We have introduced this measure because, although much progress has been made towards eliminating harmful tax practices, we must be able to take effective action against jurisdictions that do not remove them in order to afford more protection for the United Kingdom tax base. Those are the obligations of Ministers and, I should have thought, of all Members.

It is the responsibility of Governments to protect their tax base, and by taking this action we signal that we are serious about our desire to see the United Kingdom's interests protected. The Government strongly support international initiatives aimed at curbing harmful and anti-competitive tax practices. In particular, that means encouraging our dependent territories to co-operate fully with the two key initiatives—the code of conduct and the draft directive on taxation of savings, which are contained in the European tax package—that are so crucial to the City of London.

The United Kingdom has committed itself to promoting the principles in the code. We believe that our dependent territories should match up to the highest international standards and be part of international efforts to ensure fair tax competition. As major offshore financial centres, they depend on the health of European economies.

We will all benefit if there is strong and healthy competition—but only if the competition is fair and not simply predatory. This measure provides the Government

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with a reserve power to take considered action, with the full authority of Parliament, when such action is necessary to protect the tax base and the United Kingdom's economic interests.

Denzil Davies (Llanelli): I think that we all understand the purpose behind the legislation. Is it not a legitimate concern that, as I understand it, under the reserve powers the tax rates of companies can be increased in the middle of a financial year by secondary legislation?

Dawn Primarolo: If such a regulation were sought from the House, it would become effective at the company's next accounting period, whether it was in January or April. It is not retrospective.

The Government hope that, by negotiation, agreement will be achieved. However, there have been a number of occasions in the past when the United Kingdom has taken defensive measures against other jurisdictions to defend its economic interests and tax base. For example, the United Kingdom terminated two double tax treaties, with the British Virgin Islands in 1971 and the Dutch Antilles in 1988. Both treaties were terminated to defend United Kingdom interests.

In 1985, with the full support of the then Opposition, the Conservative Government secured provisional powers—the same type of reserve powers as these—to act against unitary taxation, specifically directed at California. Section 812 of the Taxes Act 1988 allows the Treasury to make an order prescribing a unitary state, and is still on the statute book.

There are strong political, economic and historic ties between the dependent territories and the United Kingdom. In many cases, that relationship contributes strongly to their undoubted success as offshore financial centres. However, mutual responsibility cuts both ways, and it would be highly unrealistic and irresponsible to expect us to allow them to enjoy the benefits without contributing to the way forward.

On the comments that have been made about Jersey, let me give hon. Members one example. There are about 19,000 exempt companies in Jersey. They pay a charge of £600—that is all—which means that they have to pay no tax at all on their income on profits arising outside Jersey. Moreover, at the moment they are not taxed anywhere else. It does not seem unreasonable that we should, as part of the international debate about tracking terrorist finance, dealing with money laundering, addressing fair tax competition and eradicating niche regimes, expect to advance this argument with our dependent territories, and they are engaging with us on that.

The UK dependent territories have the capacity and expertise to prosper without recourse to internationally damaging tax practices, and their reputations and long-term viability will be enhanced by their being part of these international initiatives. Guernsey's advisory and finance committee president, Laurie Morgan, was reported only two weeks ago as saying—as have those in other dependent territories—that he was confident that the industry would be able to adapt to any changes implemented as a result of adopting international standards. No dependent territory is being asked to do anything that the United Kingdom would not do. No dependent territory is being asked to move first or to change its system without others in the international

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framework doing the same. No dependent territory is being asked to do anything apart from engaging on a level playing field, helping us to take forward initiatives whereby all of us will prosper.

The amendment would put back by six months the best interests of the United Kingdom economically and in defending its tax base. The provisions in the reserve power provide, first, for the Government to introduce regulations and, secondly, for that to be debated in the House: only then will the matter be acted on. I say to the hon. Member for Kingston and Surbiton (Mr. Davey) that no retrospection is involved. If the regulations were required—I hope that they will not be, but the UK must be strong in signalling its intention to defend itself—the earliest date on which they could be made is that of the passing of the Bill. If regulations become necessary, they will specify exactly what they are doing, and no power within them can be retrospective. The UK is defending its economic interests and its tax base, sending a clear message to all jurisdictions about how we will conduct ourselves in the international field.

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