Finance Bill

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Mr. Davey: I support clause 67. It is exceedingly welcome and long overdue. I always thought it wrong that the British taxpayer should subsidise what effectively is a criminal activity—the paying of bribes abroad. I know that it is the practice in certain countries, and that it is the only way in which some companies can do business, but I do not see why the British taxpayer should be subsidising it in any shape or form. This is exactly the right measure, and I am glad that the Government are taking it.

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Mr. John Burnett (Torridge and West Devon): I agree entirely with my hon. Friend, but I wonder whether the Treasury, in formulating the clause, made a study of any similar laws that prevail in, for example, the United States, continental Europe or Japan. If so, I should be grateful if the Financial Secretary let us know whether the measure is part of a concerted effort by the advanced economic countries to clamp down on bribery and what similar provisions exist in the other countries with which we compete for overseas business.

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Ruth Kelly: I want to thank the Liberal Democrats for expressing their strong support for the clause. I take the constructive comments made by the hon. Member for Arundel and South Downs in the same spirit. He asked some technical questions about implementing the clause, rather than questioning its validity.

The clause corrects a technical anomaly in the tax rules on bribes and corrupt payments, to make it clear beyond doubt that tax relief is not available for bribes.The existing law denies a business tax deduction on any expenditure that constitutes an offence in the United Kingdom--in other words, if it is a criminal bribe. That virtually covers all the circumstances in which a United Kingdom tax-paying business might pay a bribe.

However, there is one unusual set of circumstances in which it is theoretically possible for a business in the UK tax net to pay a bribe without committing an offence in the UK. That is where a non-UK national in an overseas branch of a UK company pays a bribe and does not report that bribe to the UK head office. No offence is committed in the UK because there is neither a knowing mind in the UK, nor a UK national directly involved in the payment. Such instances will be rare and there is no evidence that there is a problem in practice, so I can tell the hon. Member for Torridge and West Devon (Mr. Burnett) that we are correcting a technical anomaly in tax law. We already have a system in which, by and large, bribes are not tax-deductible in the UK, and we are not making a major change that will impact on UK business.

Mr. Burnett: I am interested to hear from the Financial Secretary what the practice is in our main competitor countries.

Ruth Kelly: We are moving towards international best practice. I cannot tell the hon. Gentleman exactly what happens in other countries, although I can tell him that our approach is similar to that in the United States and other countries. We have undertaken this change in response to the recommendation from the Organisation for Economic Co-operation and Development in 1996 and the subsequent convention on bribery in 1997.

Mr. Jack: I am intrigued to know how many of the accounts examined by the Inland Revenue have a neat little insertion that states ''payment of bribe.'' I find it difficult to imagine that anyone involved in shady

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practices would make their actions so blindingly obvious that the Government think that there is a loophole to close. Perhaps the Financial Secretary could enlighten us about what triggered the need for such a provision.

Ruth Kelly: The right hon. Gentleman makes an interesting point. It is not currently a real problem for the Revenue, which does not collect information on the extent of bribes. We know that such cases are rare because few are reported by local tax inspectors, who are interested in how such payments should be treated for tax purposes. It has not been brought to our attention often, but it is a point of principle that we should not give tax relief for corrupt payments, whether they take place knowingly through headquarters in the UK or not. For those reasons, we want to close the loophole.

Given that we think the problem is relatively minor, we do not think that closing the loophole will have a substantial impact on British companies doing business abroad. On a point of principle, we should not countenance a situation in which British businesses pay bribes in order to win business. That is not the reality, because bribes tend to distort rather than help trade and competition.

Mr. Jack: I do not dissociate myself from anything that the Minister said, but what about the probing that might occur if a United Kingdom company put a line in its accounts such as ''special commission payment''? Would such an entry be subjected to more detailed analysis by the Inland Revenue to establish more clearly the motive for a payment that caught an inspector's eye?

Ruth Kelly: The right hon. Gentleman raises a purely hypothetical and speculative point, which is of no practical relevance. Tax inspectors are trained to know accounts and would of course raise such a payment with the head office, but I would not expect that to be a problem in practice.

The hon. Member for Arundel and South Downs asked whether we should extend the bribery measure to offences committed under the law of other countries as well as our own. There is no European Union angle, as he suggested; we are merely following OECD guidelines in this case. We want the maximum degree of certainty for United Kingdom companies, which the measure will deliver.

The hon. Gentleman also asked whether the disallowance of deduction on a bribe in several countries could amount to multiple taxation. I do not believe that it would, because head office expenses would be allocated between branches in different countries and each country would apply its national law to those expenses. A bribe should not be deductible in any country, and it will not be multiple taxation.

The hon. Gentleman asked whether the clause would apply if a foreign company paid a bribe overseas and attributed part of its bribe to the United Kingdom branch as a management charge. I agree in principle that it would apply, although it would depend on the facts of the case. The part of head office expenses that

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would be disallowed should equally be disallowed in the tax computation for the United Kingdom branch of a non-resident company. That is already the case for expenditure on such items as business, entertainment and gifts, and the Inland Revenue is not aware of any significant compliance issue in that regard.

For all those reasons, I ask the Committee to welcome the clause and agree to its implementation.

Mr. Flight: In principle, all hon. Members agree with the clause. In practice, I do not think that the clause will solve the problem 100 per cent., for obvious reasons. In some economies, practices such as bribery remain widespread. I do not know whether it is still the case, but in the past the French equivalent of the Export Credits Guarantee Department was a vehicle for Government bribery for contracts. A rash of scandals broke out in that respect, so I trust that the OECD has tied that matter up.

Another aspect of the territory is shown by the Tate & Lyle case, which we might have discussed under new clause 11, had it been called. That case decided that when political donations were made wholly or exclusively for the purposes of trade, they could be tax-deductible. In the spirit of clause 67, will the Government reconsider that territory? They should make it clear that tax deductibility would be denied to companies or other persons carrying on a trade who make payments to political parties in return for political favours, such as a change in the law, an honour or a Government decision, and that cases such as the Ecclestone, Desmond, Powerjet, Mittal and Hinduja cases will not give rise to tax-deductible expenses.

Ruth Kelly: I am sure that all Committee members subscribe to the view that we should have the greatest integrity in our tax affairs. Of course, we continually update our tax policy to reflect those principles and we keep such matters under review. However, the hon. Member for Arundel and South Downs specifically asked about political donations. For the record, the general expenses rule is that only expenses incurred wholly or exclusively for business purposes are deductible when computing business profits. Donations to political parties would not satisfy that test and would not, therefore, qualify for relief. I hope that the whole Committee will support the clause as it stands.

Question put and agreed to.

Clause 67 ordered to stand part of the Bill.

Clause 68

Qualifying contracts for unallowable purposes

Mr. Flight: I beg to move amendment No. 114, in page 45, line 41, at end insert—

    '(8A) A qualifying contract shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the contract does not have an unallowable purpose.

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    (8B) Any application under subsection (8) shall be in writing and shall contain particulars of the contract to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

    (8C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (8A) above, within 30 days of the notice being complied with.

    (8D) If the Board notify the applicant that they are not satisfied as mentioned in subsection (8) or do not notify their decision to the applicant within the time required by subsection (8B), the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (8A), to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (8) as if it were a notification by the Board.

    (8E) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decisions of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (8) shall be void.'.

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