Dawn Primarolo: I hope that I can deal with the amendment quite briefly because I think that it is based on a misunderstanding of the way in which the rules will work. The hon. Gentleman raised the specific question of payment from a subsidiary to a parent for shares awarded to the subsidiaries' employees, and asked whether that would be excluded from tax. Perhaps I can explain.
The amendment would have the effect of excluding from tax any amount received by a parent company from the employing company in respect of the participation of its employees in the parent company's share scheme. The result would then be a double deduction for the cost of shares. Paragraph 25 ensures that relief is given only once. It does this by disallowing all other deductions in company accounts in respect of the
''cost of providing the shares''.
Where the parent company uses a trust to purchase shares on the open market, the cost of the shares will be borne by the employing company, because it will reimburse its parent for those shares. The parent company will not bear the cost of the shares and so there is no deduction to be disallowed in its corporation tax computation. Schedule 23 ensures
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that the employing company gets the relief for the cost of the shares. It operates with the mechanisms, which answers the hon. Gentleman's question about the subsidiary company.
I will not respond in detail to the amendment because the hon. Gentleman said that it is a probing amendment. Issues of cost or double taxation are not particularly relevant because he was trying to tease out the issue of a subsidiary to a parent, which I hope that I have dealt with.
Mr. O'Brien: I am grateful to the Paymaster General. The discussion is on the record and I am satisfied by her response. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. O'Brien: I beg to move amendment No. 237, in
This is a bit more important. The amendment deals with transfer pricing, which is an important commercial matter. The transfer pricing rules in schedule 22AA to the Taxes Act 1988 allow the Inland Revenue to rewrite the pricing of intra-group transactions if it suspects that companies are avoiding UK tax by shifting expenses into high tax jurisdictions and shifting profits into low tax jurisdictions by not using an arm's-length price. Such schemes are familiar to all those who have examined that area.
The Inland Revenue has recently started to attack multinational share option plans on the grounds that they are business facilities and UK parent companies should be charging a taxable profit down to those subsidiaries. The converse case is that the UK subsidiaries should be making deductible payments to foreign parents, but the Revenue seems to be far less concerned about that. It is helpful to refer to the decision of the special commissioners in the Waterloo case, with which the Paymaster General and her advisers will be familiar. The Inland Revenue is probably—I say this without hesitation—technically correct, but the policy raises the question of what constitutes an arm's-length price, which is not unique in tax law. In practice, most people use the option gain and have parent companies recharge it to their subsidiaries, mainly because it is more tax efficient than using—I hardly dare mention this again—a Black-Scholes option valuation on grant, which is recharged. I hope that no one asks me about that because I have handed my crib sheet, which is downloadable from the internet, to the Hansard writers.
Some people have gone as far as describing the policy as stupid, which is a bit strong, but it is amazing that the Inland Revenue has said that it wants to see option gain recharging into the UK but Black-Scholes valuations for payments going out, which is illogical but increases the UK tax net. I understand that the
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Revenue may be interested in the policy to raise revenue, but it does not appear to sit well with the continuing defence, which the Paymaster General is entitled to present to us, that anything that we do to scrutinise the Bill and to gain clarification through amendments attacks her anti-avoidance proposals. The amendment does not relate to the anti-avoidance issues. In parenthesis, I worry that those issues are pedalled out to see me off, but they cannot be genuinely presented on this occasion because they would be easy words and not relevant. Frankly, a lot of frantic planning is going on at the moment.
[Mr. John McWilliam in the Chair]
Under the legislation, UK subsidiaries will be automatically entitled to an option gain deduction in contravention of apparent Inland Revenue policy. It is much simpler to have one across-the-board UK rule for transfer problems. I dare say that the Paymaster General would rightly prefer to have consistency in an across-the-board UK rule, rather than let the matter remain dependent of ministerial interpretation, which carries the risk of being open to further challenge. Amendment No. 237 would provide clarity on the transfer pricing issue, and would provide consistency.
While I have been speaking, Mr. McWilliam has arrived in the Chair. I take this opportunity to welcome you.
Dawn Primarolo: Good afternoon, Mr. McWilliam; it is nice to see you back.
If amendment No. 237 is pressed to a vote, I shall ask my hon. Friends to resist it. When the amendment was tabled, I was a little unclear on its purpose in this part of the Bill. The amendment would make a statutory link between the new corporation tax relief and the rules that apply to cross-border transactions between connected companies. The intended purpose of the amendment was not entirely clear, although the hon. Gentleman has spoken to it. It does not appear to change how an employing company obtains relief under schedule 23, but it does seem to result in double taxation, not double relief, in certain cases, which is clearly contrary to the policy intention of schedule 23. I do not think that companies would be enamoured with that prospect.
Perhaps an example would illustrate that problem. A UK employing company might provide workers to its overseas affiliate and charge for that service. To conform to the UK transfer pricing laws, that charge should be at an arm's length rate. The amendment would require the service company to charge any amount calculated by the rules in schedule 23 if relief is available in respect of shares acquired by those employees. That would result in the charge not conforming to the arm's length rate. The other tax authority would be within its rights not to allow the payer a full deduction for that amount, resulting in the same amount being taxed twice.
Mr. O'Brien: I was following what the Paymaster General was saying carefully. She used the phrase ''an overseas affiliate'' rather than subsidiary. It is a bit unlikely whether share options would be granted if the parent company was not the majority owner, and the affiliate was a minority owned interest. If ''affiliate''
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was intended to convey that it was not majority owned, the example seems not to stack up.
Dawn Primarolo: It does stack up. The hon. Gentleman knows that from debate on the previous schedules when he raised the issue about a group of companies. The problem for the hon. Gentleman is that he is trying to make an interaction between two sets of rules that do not interact. The Organisation for Economic Co-operation and Development guidance sets out what an arm's length price is for cross-border transactions between connected persons, but it is open to individual Governments to provide the reliefs that differ from those arm's-length prices in their own jurisdictions. Schedule 23 does that by providing relief to companies that exceed the amount allowable by OECD guidelines. I assure the hon. Gentleman that if I go back through that sentence so that it reads ''A UK-employing company might provide workers to its overseas subsidiary and charge for that service'', the example still stands. Therefore, if the company does not conform to arm's length rates, it will find itself liable to tax from the other tax authority.
Schedule 23 is designed to provide relief to companies offering their employees a real stake in the business for which they work. The hon. Gentleman's amendment appears to be unrelated to that policy objective, and could result in the international groups concerned being double-taxed. The amendment simply does not work and the schedule does, so I urge my hon. Friends to oppose the amendment.
Mr. O'Brien: I have listened carefully to the Paymaster General and I agree with her re-reading of the sentence with the words ''overseas subsidiary'' rather than ''affiliate''. She has given an example that works with the term ''an overseas subsidiary''. I did not think that it worked for something that was not a subsidiary, which was why I questioned the word ''affiliate''. In an annual report and accounts it is normal parlance to use the word ''affiliate'' deliberately, to ensure that one is referring to something other than a subsidiary.
However, having given the example, I think that I have made my position clear. Initially, I had thought that we might press amendment 237 to a vote, but the last thing that the official Opposition want to do is get involved in the question of double taxation. I do not want to encourage the Paymaster General to think that every time she says ''anti-avoidance'' or ''the amendment seems to provide a double taxation opportunity'' I shall immediately retreat. We have never intended to impose double taxation—where it does not already exist—or anti-avoidance.