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Session 2003 - 04
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 111

Standing Committee A

Tuesday 11 May 2004


[Sir John Butterfill in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and
282 to 289, and schedules 1, 3, 11, 12, 21 and
37 to 39)

Clause 30

Provision not at arm's length:
transations between UK taxpayers

Question proposed [this day], That the clause stand part of the Bill.

2.30 pm

Question again proposed.

The Paymaster General (Dawn Primarolo): I welcome you to the chair for our deliberations this afternoon, Sir John. It is a pleasure to see you, and I will be extremely careful, as always, because you will be paying close attention to the many areas of discussion on which you are very knowledgeable.

Before we broke from this morning's sitting, we were considering clause 30 on transfer pricing. I have dealt with the specifics in the questions from the hon. Member for Hertford and Stortford (Mr. Prisk), and in my closing remarks I wish to clarify the purpose of the clause.

This morning we discussed issues around transfer pricing. The rules are vital to ensure that businesses, especially multinationals, are taxed fairly in respect of their activities in the United Kingdom. Until now, taxes have applied only to cross-border transactions. Doubt had been thrown on their effectiveness because of decisions made in the European Court of Justice on the tax rules of other countries. Clauses 30 to 37 address the uncertainties that business has identified.

I also made it clear this morning that, although the Government are responding to those uncertainties, we will defend any challenges to existing UK legislation. I am perfectly at ease with the proposal, and I explained to the Committee that we are content. My officials advise me that the proposals cause no further uncertainty; rather they provide the structure that the companies concerned wish to see.

Mr. John Burnett (Torridge and West Devon) (LD): I, too, welcome you, Sir John. The Paymaster General is, as usual, being patient. She will recall that this morning I alluded to tax harmonisation, to which I am utterly opposed, in the points that I made about what the Spanish Government are doing about transfer pricing and thin capitalisation.

I have received a brief from the Institute of Directors, which I am sure the Paymaster General has seen. The institute makes an excellent point, which is very relevant to what she has just said about the encroachment on our independent, sovereign power to tax. It reluctantly concludes that

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    ''the Government had little choice but to pass this legislation, although we continue to call for an amendment to the European Treaties''—

it splits an infinitive but I will not—explicitly to allow

    ''member states to ''discriminate'' in tax matters.''

I would very much favour that, and I look forward to hearing the right hon. Lady's views on such an amendment to the treaty.

Dawn Primarolo: Transfer pricing regulations and tax guidance are not the subject of amendments to the treaty. As I explained this morning, the UK has operated those provisions for some time, following the principles laid down and recommended by the Organisation for Economic Co-operation and Development. The Inland Revenue operates them with some aplomb. Transfer pricing regulations and rules are about insuring and protecting the corporate tax base of this country. As I said a number of times this morning, the Government and the Inland Revenue considered that our legislation was compatible, but we also recognised that it was essential, because of the response of business and its view that there was uncertainty, that we put these matters beyond doubt. That is what clauses 30 to 37 do.

The Government have repeatedly made clear their views on tax harmonisation. On behalf of the Government, I have in various Committees of this House and in different debates made it clear that they do not subscribe to tax harmonisation and that they continue to argue in every forum for the right of member states to determine their own tax rates.

As tempted as I am to probe whether the hon. Gentleman may be more at ease on the Government Benches with regard to policies on tax and the European Union, I fear that you will say that I am going beyond the scope of the clause, Sir John. Perhaps I should stick to clause 30, unless the hon. Gentleman wishes to stand up and declare himself so in support of this Government that we can welcome him to our Benches.

Mr. Burnett: I am certainly not going to make the intervention that the Paymaster General invites me to make, but—

Mr. Stephen Pound (Ealing, North) (Lab): It is seductive.

Mr. Burnett: We come back to seduction. I am being led astray by the hon. Gentleman again.

Regrettably, a growing body of EU legal cases continues to encroach on our ability to set our own taxes and to have our own UK competitive tax system. That is especially so in the corporate sector. Will the Paymaster General and her erudite and eminent colleagues at the Treasury consider an amendment to the EU treaties enabling—

The Chairman: Order. The hon. Gentleman is straying way beyond the scope of the clause. However fascinating the Government's opinion on this subject may be, the Paymaster General has already made their view clear and I would be grateful if she was not tempted down that route again when responding to the intervention.

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Dawn Primarolo: In that case, I will return to the discussion on the impact of clause 30. The hon. Member for Torridge and West Devon (Mr. Burnett) touched on the following point this morning. Clauses 30 to 37 deal with each element involved. As a combination, the clauses are broadly revenue-neutral. I am responding to points that hon. Members have made, but it is probably more relevant to discuss this matter as we go through the clauses.

However, the Government recognise that the extension of the transfer pricing requirements has the potential to increase administrative requirements on companies, so following discussions with business the clauses implement a package of measures to mitigate the effect of the change. Examples include the exemption for small and medium-sized companies under clause 31, which we will be able to probe later, and considerations involving dormant companies for the 1 April 2004 period.

The hon. Member for Hertford and Stortford touched on administrative pressure. Clause 33 relates to the relaxation of penalties for record keeping for a transitional period. That touches on the question that the hon. Gentleman raised, namely why we do not delay. I have explained why delay is not possible, given the uncertainty. Therefore, in consultation with business, the Government sought other arrangements to provide that transition period. The hon. Gentleman also touched on the question of loans. As he knows, we deal with the question of securitisation in later clauses, so he will forgive me if I do not deal with those specific points now.

Clause 30 extends the scope of transfer pricing requirements to include United Kingdom transactions, in order to address the uncertainty that has arisen in the existing legislation. The clause also extends the scope of the existing rules for compensating adjustments, which enables double taxation to be addressed, so that an increase in the taxable profits of one company can be reflected in a compensatory adjustment of taxable profits in another. The clause introduces a new system of balancing payments. Where a transfer pricing adjustment has been made for tax purposes, a group can make a payment with no further tax consequences, either for the payer or the recipient, to keep its cash position in line with its tax position. Finally, clause 30 gives effect to schedule 5, which makes the detailed consequential amendments to the existing legislation. So, clause 30 deals with the scope of the existing rules, their extension to UK transactions, compensatory adjustments and the introduction of balancing payments.

As I said, the uncertainty must be addressed because of its consequences for business at present. I touched on that this morning with regard to keeping open accounts. That is why, in giving business time to adapt fully to the system, we are, first, relaxing penalties for a transition period of two years, and secondly taking steps to minimise the effect on business. The hon. Gentleman touched on the question of investment. It is important to remember that there will be no effect on investment because the question that transfer pricing deals with is which

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company a profit arises in, not what the overall level of taxable profit is.

The hon. Gentleman also touched on the question of royalties in a group. Groups of companies are used to charging royalties on cross-border transactions. It is true that those will, in some cases, become a requirement under UK law. That is an example of what transfer pricing means. We are acting to restore certainty about the effectiveness of the rules, which are essential to defend the corporate tax base of the UK, and we have taken important steps to mitigate the increased requirement on some companies. As I said, we will come to various other requirements in subsequent clauses and, in particular, to the exemption that will cover 95 per cent. of small and medium-sized companies.

The hon. Gentleman said that we were responding to corporate tax reform on a piecemeal basis. He will not be surprised to hear that I do not agree with that suggestion. We recognise the need to have a wide-ranging dialogue with business concerning all the implications of the corporate tax system, including recent developments in European law, and, in particular, considering our corporate tax system and whether it has responded, and is relevant, to the changing needs of companies, the economy and the world economy. That commitment to a dialogue was clearly set out in both the pre-Budget report and the Budget. The issue for the Government, based on what companies were saying to us, was that ongoing dialogue, which covers a wide range of areas, does not remove the urgent need for action on transfer pricing.

2.45 pm


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