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Mr. Flight: I thank the Minister for her comments. I want to be clear on the matter, so I shall use simple language. One or two Finance Bills ago, Vodafone disagreed with the Government about certain tax proposals. Had it migrated, as it threatened, the immediate reason would have been fiscal. However, it could have been argued that it was also commercial. I cannot imagine that had Vodafone gone through the due legal process and
We support and understand the need for the anti-avoidance objectives, but I am not clear about the practicality of the proposals as they relate to company mobility, especially of multinational headquarters. The Minister said that the CFC rules will end after three years. I repeat my request: does that serve to produce the same effect as our amendment, which advocates the same three-year limit?
Ruth Kelly: I repeat that we want to ensure that companies do not migrate from the UK purely for fiscal reasons rather than for genuine commercial reasons. There will be a process of negotiation between the Inland Revenue and an individual company. As long as the facts are clear and the Inland Revenue is convinced that the migration is for purely commercial reasons, it will be approved.
Mr. Michael Jack (Fylde): So that we understand the Minister's point with even greater clarity, will she comment on the motive test that is used to determine the adjudication of the Inland Revenue as part of the process that she describes?
Ruth Kelly: The purpose of the clause is to build on processes that are in place. The Inland Revenue informs me that two thirds of the applications that are made to it for migration on the basis of commercial reasons are approved. It has encountered no particular difficulties. The facts of the case are not often in dispute and it is usually apparent whether the move is for genuine commercial reasons or tax reasons. The Inland Revenue hopes to continue that practice.
Mr. Jack: I did not ask for a description of how the Inland Revenue operates. I want the Minister to tell us a little more about the method of adjudicating the motive for companies that move, such as the example cited by my hon. Friend the Member for Arundel and South Downs (Mr. Flight). It is the motive test that interests me, not the fact that the Inland Revenue is performing its duties successfully.
Ruth Kelly: I shall certainly write to the right hon. Gentleman on the detail, but the clause is not about judging motive. It relates to the facts on the table and making a decision about whether an arrangement is artificially contrived to avoid tax. If the board of a company gets on a plane every month and holds its meetings in a different country while retaining control within the UK, that would clearly be artificially contrived to avoid our tax legislation. The Inland Revenue would reasonably wish to recover tax in such circumstances, and the clause will allow it to do just that.
Mr. Flight: Again, I thank the Minister for her comments. I believe that she is saying that if a company emigrates for genuine reasons and its management and control are clearly overseas, that is acceptable. However, if it gets up to wheezes such as holding board meetings abroad when most of its activities at headquarters are conducted here, that is avoidance. The clause appears to be capable of operating in that context.
I had in mind a company that has left the country properly, taking its control and management overseas, because of lower taxation in, for example, Germany. The Minister implied that that would be a commercial reason for migrating and not a false fiscal reason. I thank her for clarifying how the clause will work and I beg to ask leave to withdraw the amendment.
"(11) This section shall come into force on such day as the Treasury may by order made by statutory instrument appoint, but no such order shall be made until an economic impact assessment has been made of the effect of the changes on activity and employment in the oil industry in the North Sea.".
Mr. Flight: The issues raised by the amendments are some of the most important that we shall consider. The Committee and the Government will be aware that a broad cross-section of people in political partiescertainly Scottish MPs of all partiesand the oil industry think that the proposal is not wise. I hope that the Government will listen to the arguments and think about them before we reach the Bill's final stages.
To make sense of the amendments, I shall run through the arguments. The clause imposes a 10 per cent. supplementary charge on top of the 30 per cent. corporation tax charge on oil companies. Clause 91 sets out the process for assessment and clause 92 sets out the transitional provisions. The amendments are designed, in different ways, to prune back or check what is provided and, in some cases, to delay implementation until proper further consideration is given.
The central issue is that the Treasury argues that it will be commercially successful to levy significant extra tax on the oil industry. The Treasury knows that independent assessment estimates that, if oil prices remain reasonably stable, between now and 2010 that will generate about £6 billion in extra tax, some £2 billion of which will be realised in the coming fiscal year. The Government's case is that that would not materially damage investment, employment and operations in the North sea.
The Government have made the wrong judgment. On the central issue of the movement of oil prices, I suspect that they did their thinking earlier in the year when oil prices were higher. They did not expect oil prices to be in the order of $18 to $20 or take account of the increases in output from Russia over the next few years.
Mr. Flight: I have found no such evidence; if anything, oil production is overtaxed, particularly in relation to the risks and nature of the businesses, as I shall explain. I have been trying to stress that the Treasury decision was made in the expectation of higher oil prices and was commercially wrong. That has nothing to do with whether it was morally right or wrong. The Treasury's analysis was grounded on excess profitability, but was based on far too short a period of profitability in recent times when oil prices have been higher. Independent analysis of profitability shows that between 1996 and 1999 profit margins have been as little as 1 to 8 per cent., based on an oil price of $15 to $20 a barrel. The United Kingdom needs to be fiscally attractive to meet the challenge of a mature industry that has an unfavourable risk reward profile compared with other parts of the world, particularly the Mexican basin, and whose operations are relatively expensive.
Mr. Frank Doran (Aberdeen, Central): The hon. Gentleman's arguments would be a little stronger were it not for the fact that in 1993 the Conservative Chancellor raised oil taxes and took £600 million to £700 million from the North sea. Some commentators, encouraged by the then Chancellor, described that as a boost to the North sea oil industry. How is that consistent with the hon. Gentleman's position?
Mr. Flight: First, the lesson was learned. I am not sure that the hon. Gentleman gave the correct date. He mentioned 1993, but I think that the lesson was learned in 1983 when the Conservative Government put up taxation on the back of rising oil prices. There was a reaction, which will be repeated if the present measures are accepted, but thereafter there was a settlement with the industry.
Malcolm Bruce (Gordon): The hon. Gentleman may recallI was in the House then and remember it wellthat we divided the House and voted against the Conservative Government. The then shadow Chancellor refused to join us on the grounds that he supported the then Government's tax.