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Adam Price (Carmarthen, East and Dinefwr) (PC): Amendment No. 4 gives us an opportunity to raise the general issue of the benefits of fiscal competition. As I understand it, the amendment would at least facilitate some tax competition in the European Union, and I am therefore glad to support it in the name of my party.
I believe that a general premise behind Government policy is that all tax competition is harmful. I contest that, because it can have a beneficial effect as a catalyst for economic growth. When used judiciously, it can increase social and economic cohesion in the European
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Union by supporting economic development in less favoured nations and regions. I understand what inspires the Government's approachit could be described as financial protectionism to protect the tax revenue base. However, in view of the Government's wider policy of promoting economic reform and development in the European Union, it is important to qualify the approach with some understanding of the benefits of tax competition.
Plenty of evidence shows that tax competition works. Lord Desai has produced an extensive paper, which shows the evidential basis for fiscal competition, including US companies' profit rates across a wide range of tax jurisdictions. Let us consider Ireland, which was the sick man of Europe 20 years ago. It cut corporation tax from 50 per cent. to the current 12.5 per cent., as well as capital gains tax. Consequently, in the late 1990s and the early part of this century, it achieved incredible rates of economic growth, averaging approximately 10 per cent.
There is therefore a role for fiscal competition, and I do not believe that we should close that off to the European Union, especially new member states, which are cutting corporation tax. Poland is cutting corporation tax from 27 per cent. to 19 per cent. Hungary is cutting it to 16 per cent. Latvia, the Czech Republic and Slovakia are also following that route. Surely the Government should encourage a judicious use of fiscal competition on the part of less favoured nations and regions in the European Union. For example, the Basque country uses such a facility. Within Spain, corporation tax is devolved in the case of the Basque country and Navarre. We would like that policy to be adopted in Wales and Scotland. I know that the Northern Irish parties also support that.
John Bercow: The case for tax competition is indeed compelling. However, let me put it politely and in a spirit of good will to the hon. Gentleman that one does not need to refer to Lord Desai to be persuaded of the cogency of that argument. The thesis in support of capitalist competition has been argued persuasively and for a long time by the Conservative and Unionist party.
John Bercow: I put it to the hon. Gentleman that there is one important difference between his party and mine. His party believes in the break-up of the United Kingdom and my party believes in its retention.
It would be interesting if the Minister could give us a little more information about the committee of tax experts that the Government have said they will institute
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in response to a number of casesnot only the Cadbury-Schweppes casethat are before the European Court of Justice. The likelihood is that the Government will lose the case and that the legislation on controlled foreign companies will be struck down by the court. What are the terms of reference for the committee that the Government will institute as part of its presidency? Obviously there can be wide-ranging implications for Government policy.
John Healey: More than 20 countries have adopted controlled foreign company legislation, including nine European Union member states. The CFC rules stop UK companies avoiding UK tax by diverting profits to low-taxed foreign subsidiaries. Some groups have artificially provided their subsidiaries with certain types of income. Others have arranged for subsidiaries to have an apparently high rate of tax to be repaid to a different group member. Thus the company appears to have paid a high level of tax when in reality it has done no such thing. All such devices are designed to distort the application of the lower-level-of-taxation test. The clause amends the operation of the test to prevent artificial distortions. It contains a timing rule to prevent CFCs from manipulating their accounting periods to defer the application of this legislation.
The hon. Member for West Suffolk (Mr. Spring) raised the case of Cadbury Schweppes. We do not believe that the operation of our CFC rules breaches the European treaty. As in other aspects of the corporation tax system, we will strongly defend our system against challenges under EU law. I trust that we would have support from the Opposition for so doing.
The hon. Gentleman follows these matters closely enough to know that the Advocate-General's opinion is not always followed by the European Court of Justice. It is the judgment of the court that counts. The court cannot come to its view or its verdict until it has heard the case, which it has not yet done. I was interested to hear the hon. Member for Carmarthen, East and Dinefwr (Adam Price) make common cause with the Conservatives. Anyway, he asked a specific question, the answer to which is that in response to a specific request by Germany that the impact of ECJ decisions on member states' finances is discussed by ECOFIN, the ECOFIN meeting on 7 June agreed that our presidency in the latter part of this year should host an informal high-level discussion among member states, and we are happy to do that. I cannot agree with either of the amendments tabled by the hon. Gentlemanone would lead to the CFC rules becoming inoperable, while the other would allow the precise manipulation of the rules that we are seeking to counter to continue. I urge my hon. Friends to resist the amendments if they are put to the vote.
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Mr. Spring: The hon. Gentleman says, "I think". Perhaps he would like to explain the rules. The hon. Gentleman has no answer, and apparently neither does the Minister. Will he explain in what way the amendment is inoperable in terms of CFC rules?
Clearly, the Minister will not give us an answer. Perhaps that is symptomatic of much of what has gone on. I was very interested in the comments of the hon. Member for Carmarthen, East and Dinefwr (Adam Price) about tax harmonisation and the culture prevailing in the European Union. I accept what the Minister said about the CFC rules being there to avoid tax by securing profits in low-tax countries, which I understand, and he reassured us that that does not breach European treaties. We shall see what happens with the Cadbury Schweppes case, which is very important.
Obviously, the amendments are probing, and although the result of our probing has not been wholly satisfactory, I hope that the Minister will consider our points. We are in new territory, in a sense, with European Court of Justice rulings, and with the tax implications of the ever-lower corporate tax burdens in other parts of the European Union and not in our country.
The Government's intention in clause 69 is to abolish the bespoke complaints service for National Savings and Investments, the so-called statutory adjudicator, and to transfer the responsibility to the voluntary jurisdiction of the Financial Ombudsman Service. In essence, our amendment would alter that to the compulsory jurisdiction of the ombudsman under the auspices of the Financial Services and Markets Act 2000. Although clause 69 is one of the shortest clauses in the Bill, that is an important change nevertheless.
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