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Session 2006 - 07 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
Clerks
†
attended the Committee
Public Bill CommitteeTuesday 22 May 2007(Morning)[Mr. Roger Gale in the Chair]Finance Bill(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)Clause 34Schemes
etc designed to increase double taxation
relief
10.30
am
Question
proposed, That the clause stand part of the
Bill.
Mrs.
Theresa Villiers (Chipping Barnet) (Con): The clause is
targeted at so-called “booster” schemes designed to
increase the amount of tax attributable to a foreign subsidiary and so
increase the amount of double taxation relief that can be obtained. The
Opposition have some sympathy with the objectives of the clause and
certainly will not oppose it. However, I have some questions on how the
clause operates and on the longer-term prospects for the reform of
double taxation
relief.
Which
of paragraphs 2 to 6 of schedule 28AB to the Income and Corporation
Taxes Act 1988 did the Government have in mind when amending section
804ZA, as proposed in the clause? Will the Chief Secretary outline
which scheme is targeted, bearing in mind that the change in law was
triggered by the disclosure regime? Will he also explain why this
problem was not picked up at an earlier stage, as boosting by using UK
as well as overseas tax has been known about since 2005? Why does
clauses 34(4) refer to foreign tax paid
“on or after 6th December
2006”?
Does that mean
that when a UK company pays a dividend to an overseas company out of
profits on which tax was paid before 6 December 2006—tax paid in
2005, for example, or the first two quarterly instalments of
2006—these rules do not apply, even if the overseas company pays
the dividends onward after that
date?
On the
longer-term prospects, the Committee should note that the clause and
the provisions it will amend may soon be redundant along with the
controlled foreign company rules to be amended by clause 47. Paragraph
3.39 of the Red Book states that the Government are shortly to publish
a consultation document on the future of the rules on the taxation of
foreign dividends. We welcome the Government’s indication that
they are considering a general reform of the taxation of foreign
profits, as there is a pressing case for reform and simplification of
the law in that
area. The rules on the taxation of foreign profits that we are
considering—double taxation relief and the controlled foreign
companies regime—are ferociously complicated, and one of the
most difficult areas of our tax law, which has been subjected to
frequent amendment over the last few years and involves significant
levels of uncertainty. It can take several years for the foreign tax
position to be
finalised.
There are
a number of technical flaws in the legislation. For example, it
struggles to deal with situations where overseas companies pay tax as
part of a consolidated group. There are also question marks as to
whether the DTR rules are fully compatible with EU law. Chris Sanger of
Ernst and Young
said:
“The
current system is cumbersome and acts as a deterrent to businesses
seeking to invest in the
UK.”
The Institute for
Fiscal Studies, too, has questioned the effectiveness of the DTR
rules:
“Overall,
the trade off between the costs and benefits of the credit system
compared with the exemption system is unclear, and the theoretical case
for retaining the credit system does not appear to be
compelling.”
Some
illumination on that trade-off can be found in the Red Book. Table A3.1
discloses that the Government pay out about £10 billion in
double taxation relief. The revenue collected through the taxation of
foreign profits, while not de minimis, is certainly low enough to
prompt the question of whether that revenue is worth the competitive
disadvantage of requiring increasingly mobile multinationals to jump
through all the relevant, highly complex hoops to ensure that they meet
the requirements of the UK’s double taxation regime—a
regime made just that bit more complex by the measures in the
Bill.
The Committee
might usefully consider whether the present rules get the trade-off
between revenue collected and competitiveness right. There are some
attractive arguments for simplifying that part of the tax system to
incentivise the repatriation of foreign profits. That could make the UK
tax system more competitive and boost investment in the UK. It could
also make the UK more attractive as a destination for corporate
headquarters and holding companies, which could strengthen foreign
direct
investment.
Recent
studies by the International Monetary Fund have shown that there is
considerable potential benefit in cases where companies are encouraged
to repatriate their foreign profits. Changes in US law to facilitate
bringing foreign profits back onshore have also proved successful. When
looking at those matters, we should bear in mind the decision by
companies such as Yahoo, Google and Amazon to locate their headquarters
in Ireland rather than in the UK. Taking those factors on board, the
Opposition have been looking at the merits of moving to a participation
exemption for foreign profits, along the lines of those used in a
number of countries in mainland
Europe.
With that in
mind, I have a series of questions for the Chief Secretary about the
process of reforming DTR that the Government envisage undertaking.
First, when will the consultation document promised in the Red Book be
published? The Red Book refers to it being published “later in
the Spring.” I am of course aware that climate change is doing
some odd things to our seasons, but one would have thought that
“later in the Spring” would mean by now, or by the end of
the month at the latest. Do the Government expect to
publish the document before the end of the Committee’s
deliberations, as it would be useful in assessing the merits of this
clause and clause
47.
My second series
of questions concerns the options for reform and the long-term
replacement of the DTR rules. Will the Government assess the potential
that a sensible reform might in the longer term have to increase tax
revenues as a result of the UK becoming a more attractive place for
investment and for corporate headquarters? Have they carried out
studies on the impact of the introduction of participation exemptions
in countries such as Spain and Australia? Did they consider a
participation exemption when they introduced the major legislative
change in 2000 that governs the taxation of foreign profits? Why did
the Government reject that at the time, and given that they are now
apparently considering such an exemption, do they believe that it was a
mistake to reject that option in
2000?
Thirdly, in
embarking on the reform process, what constraints are placed on the
Government by the EU? I understand that the Primarolo group
criticised aspects of the Dutch participation exemption. Do the
Government expect the Paymaster General’s work in Brussels to
constrain their choices in reforming the UK’s system of taxation
of foreign profits? Lastly, it would be useful for the Committee if the
Chief Secretary expanded on the statement in paragraph 3.39 of the Red
Book that the Government’s consultation document on the
issue
“will also
consider the implications of any such reform for other aspects of the
UK tax regime, such as interest
relief.”
Are the
Government planning to abolish relief for interest on borrowing used to
invest in foreign shareholdings, or only to restrict it? Is that move
inevitable if a participation exemption is introduced? If so, what sort
of impact assessment have the Government carried out on the effect of
such a move?
One
should also bear in mind the fact that the effect of abolishing relief
on interest on borrowing to finance overseas investments would raise
considerably more than the revenue that would be lost as a result of
introducing a participation exemption. Does the Chief Secretary regard
the upcoming reform process as a revenue-raising exercise? I would
counsel a cautious approach. While moving to an exemption system would
offer attractions in terms of simplicity, some of which I have
outlined, we do not want to replace the highly complex DTR and CFC
rules with another highly complex set of rules for determining when
relief will be given on
interest.
I close by
referring to the Institute for Fiscal Studies, which carried out an
interesting study on the
issue:
“There
are various ways in which the UK government could seek to recoup any
significant amount of revenue lost by replacing the credit system with
an exemption system. One suggestion would be to restrict the extent to
which interest payments on debt that is used to finance overseas
investments could be deducted against profits in the computation of UK
corporation tax liabilities, along the lines of interest allocation
rules used in the US. Unfortunately, since it is extremely difficult,
if not impossible, to determine which particular borrowing funds which
particular expenditures, restrictions of this kind run the risk of
becoming both complex and arbitrary. It would be difficult to be
confident that the combination of an exemption system with interest
allocation rules would result in a system that would be significantly
simpler than the current credit system. It is
also very hard to estimate the net revenue consequences and precisely
who the winners and losers would
be”.
A
well-structured programme of reform and simplification in that area of
taxation could have a significant positive impact on the
competitiveness of UK plc. In reaching the conclusion on the best
option for reform, I hope that the Government will have full regard for
the headaches that the current complexity of the DTR and CFC rules
cause business, and their negative impact on our competitiveness in the
increasingly globalised world
economy.
Mr.
David Gauke (South-West Hertfordshire) (Con): First, may I
reiterate a point made by my hon. Friend the Member for Chipping Barnet
about the date of publication of the consultation document on the
taxation of foreign profits? I know that there is considerable interest
in that document, particularly in the City, and it would be helpful to
know when it will be published.
Secondly, may I press the
Chief Secretary on whether the clause is merely a clarification of the
current law or a change? The reason I ask that question is that when
flicking through the explanatory notes I found that such is the
insistence that the provision is a clarification and no more that it is
difficult not to be suspicious. We are told that the clause confirms
that foreign tax
“includes UK tax for which double
taxation relief is
claimed.”
The
explanatory notes go on to state that subsection (2) removes
“any doubt” about that particular matter; subsection (3)
“removes any doubt”; subsection (5) is a
“clarification”; subsection (6) “makes it
clear” that a particular point is the case; and finally, the
background note states:
“The amendments put it
beyond doubt that ‘foreign tax’ in this context includes
UK tax.”
Such is the
Treasury’s insistence on that point in the explanatory notes
that one cannot help but being a little suspicious.
It is particularly important
that the measure is a clarification and no more, in part because the
commencement is backdated to 6 December 2006—the date of the
pre-Budget report. I assume that an announcement of such measures was
made at the same time. Given that it is in a sense backdated, it
clearly should be a clarification and no more. Will the Chief Secretary
confirm that the current law really does intend that UK tax should be
treated as foreign tax for those purposes, that the Government are not
simply trying to change the law to address a genuine loophole that had
not been addressed, and that that is not a new
point?
The
Chief Secretary to the Treasury (Mr. Stephen
Timms):
Mr. Gale, I bid you a warm welcome back
to the Chair and welcome all Committee members back to a new day of
scrutiny.
As
the hon. Member for Chipping Barnet rightly said, the clause will
introduce changes to section 804ZA of the Income and Corporation Taxes
Act 1988. That section is anti-avoidance legislation, introduced in the
Finance Act 2005 and aimed at schemes and arrangements designed to
increase double taxation relief. Picking up the point made by the hon.
Member for South-West
Hertfordshire, I confirm that the aim of the measure is to put beyond
doubt the issue of what should be regarded as foreign tax for the
purposes of the legislation, rather than to introduce a
change.
We were
confident that the measure in the 2005 Act covered the point, but
disclosures made to Her Majesty’s Revenue and Customs have cast
some doubt on that—there is clearly doubt in the minds of some
people—so the aim of the clause is to put the matter beyond
doubt and to remove any uncertainty. HMRC has received disclosures of
schemes that purport to avoid the effects of the 2005 legislation on
the basis that the tax in respect of which DTR is claimed is UK tax
rather than foreign tax. That is the point that the clause will
clarify. We have always taken the view that such tax should be regarded
as foreign tax and should therefore be included. The clause puts it
beyond doubt that, in this context, the term “foreign
tax” includes UK tax. It clarifies the fact that any reference
to foreign tax in the DTR anti-avoidance legislation includes UK tax,
ensuring that the anti-avoidance legislation works as originally
intended.
10.45
am
The
hon. Member for Chipping Barnet asked me which paragraphs of section
804ZA of the Income and Corporation Taxes Act 1988 are affected by the
clause. It will cover section 804ZA as a whole; the booster scheme in
question is countered by paragraph 4 of schedule 28AB to the 1988 Act.
That may be the particular reference that she was asking about. Quite a
number of avoidance schemes have been closed down following the
introduction of the 2005 legislation, resulting in considerable tax
savings to the Exchequer, so those measures were effective. However, we
need the clause to put the original intention of the legislation beyond
doubt. It is worth underlining the point that we will continue to
challenge robustly any schemes that emerge where, in our view, the 2005
legislation has effect.
The hon. Lady has made the
point, and the hon. Member for South-West Hertfordshire also referred
to it, that we will be setting out our options for change for the
taxation of foreign profits in the near future, and the consultation
document will be published shortly. Any changes that may be made will,
quite rightly, require extensive consultation and discussion. There
will be a lot of interest in the matter and it is important that we get
the details right. The change introduced by the clause is needed to put
beyond doubt the application of the 2005 targeted anti-avoidance rules.
The longer-term reform is a separate exercise and the measure before us
cannot wait until the outcome of that
review.
I have noted
the points that the hon. Member for Chipping Barnet made about the
long-term reform of taxation of foreign profits. She asked a number of
questions about that consultation, but all I can say at this stage is
that she must await publication of the consultation document for the
launch of that debate. I am sure that there will be many who advance
points of view along the lines of those she set out and others will no
doubt have other perspectives to contribute to that debate. I can
reassure the Committee that it will not be long before that document
appears. Finally, picking up
the point correctly made by the hon. Member for South-West
Hertfordshire, we published draft legislation along with the pre-Budget
report, which is why the changes will take effect from that date. No
adverse comments have been received in response, so I commend the
clause to the
Committee.
Question
put and agreed
to.
Clause 34
ordered to stand part of the
Bill.
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