Mr.
Timms: We have had a helpful discussion on the schedule
and the amendments. The new exemption from corporation tax for
dividends and other distributions received from foreign companies which
is introduced by the schedule is a key element of the package to
enhance the attractiveness of the UK as a location for multinational
businesses. As the hon. Gentleman said, it takes effect from 1 July
2009. I
say in passing that we have thought very carefully about the
implementation dates of the various parts of the package. Therefore, as
we will discuss shortly, we are introducing the debt cap for an
accounting period which will begin on or after 1 January 2010, so that
businesses have time to prepare. That the measure is being introduced
later than the dividend exemption has been widely welcomed.
The hon.
Gentleman asked about transitional arrangements. Any profits accrued in
a foreign subsidiary before the package comes into force can be paid
out as an ADP dividend and remain subject to the current rules, which
may be a helpful
clarification. Considering
the tax treatment of branches would have raised more issues and
diverted attention away from the main point, which is the taxation of
foreign dividends. We will bear branches in mind when we look at future
options for controlled foreign companies, but we will not consider the
treatment of foreign branches in detail until after the consideration
and reform of the CFC
rules. I
have one further point to make about the interaction with the ADP
exemption. Amendment 100 removes the restriction on double taxation
relief. Amendment to the CFC changes in schedule 16, which we will come
to, will allow the split period to also be treated as split for the
purpose of double taxation relief. There was indeed a problem in the
area highlighted by the hon. Gentleman when the Bill was initially
drafted, but I think that that has been solved by the various changes
that we will debate
today. Question
put and agreed
to. Schedule
14, as amended, accordingly agreed
to.
Clause
35Tax
treatment of financing costs and
income Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: This is an important clause. A number of issues
have emerged since it was tabled, including the number of Government
amendments to it. The extensive nature of the new rules on
anti-avoidance and financial services groups is also important and
needs to be addressed.
However, I want to say something more broadly about the debt cap,
because it is has given rise to some concern about what sort of
behaviour it will incentivise. Is it the best way to tackle the issue
that concerns the Government? Are we at risk of introducing a
cumbersome process that will add to the compliance cost of business?
Let me talk through some of those issues.
As the
Minister indicated in the debate on clause 34 stand part, some of the
cost of the dividend exemption has been offset by the introduction of
the debt cap. That leads to interesting issues as to whether those
reforms are linked, in the sense that if clause 34 is introduced, does
clause 35 have to be introduced, or are the reforms taking place in
parallel, with one raising revenue and one leading to a loss of revenue
just a matter of convenience rather than a matter of planning how the
tax structure will work? Clearly, when the debate about the taxation of
foreign profits started in 2007, the Government had other ideas about
how to tackle some of the behavioural challenges that arose from it. It
was only when the original ideas on the control of companies ran into a
degree of flak that they then moved on to the debt
cap. The
aim of the worldwide debt cap is to target situations in which a UK
group bears more debt than is required to finance the worldwide group.
In addition, the measure could provide an effective means of targeting
many upstream loans to the UK that are used to repatriate overseas
cash. However, in order to protect those groups that are temporarily
cash rich, the Government intend to allow the worldwide debt cap
measure to be set aside where the group is in a short-term cash-rich
position. Of course, that stems from the point that has been quite
widely debated over several years that the UK has a very generous
regime for interest expense—it is fully deductible. It is one of
the issues that has perhaps led to an increase in leverage among a
number of companies over the course of recent years and has certainly
led to concern about whether it has incentivised a particular type of
behaviour.
Although the
Government flagged up last year that that is what they wanted to do,
there is still concern about the workability of the proposals. Deloitte
said: “Unfortunately
the provisions remain very complex and represent a major compliance
burden for groups even if they will have no ultimate disallowance of
interest.” Adding
32 pages of tax codes could make the risk overly burdensome. The
Institute of Chartered Accountants believes this matter could have been
addressed in other
ways: “We
believe that the same policy objectives, which are to prevent the
‘dumping’ of debt into the UK part of worldwide
operations and the penalisation of upstream loans to the UK, could
equally well be achieved by tightening up the existing thin
capitalisation regime and introducing targeted rules against upstream
loans.” 12.30
pm Could
other policy routes have been used to tackle unnecessary upstreaming
that would not have added to the compliance burden on businesses? In
the brief stand part debate, the Minister referred to the different
commencement date for the debt cap arrangements. Will the gap between
commencement dates be used for further consultation and to explore the
alternative solutions, or are the Government determined to take this
route?
Since the
original proposals were published in draft last year, there has been
movement by the Government and some of the complexity has been ironed
out. However, UK-only groups will still be caught by the measure and
will have to go through some compliance steps, which is regrettable.
The proposals are meant to deal with debt that is incurred outside the
UK by international groups, yet it appears from the drafting that UK
companies will have to pay unnecessary additional
taxes. The
debt cap places restrictions on the relief given to UK companies that
form part of a worldwide group relating to the interest and finance
expenses on transactions with related companies. The extent of that
restriction on the intra-group interest and finance costs will depend
on the external financing costs of the worldwide group. The Chartered
Institute of Taxation questions why those restrictions are required,
saying
that “It
is not clear to us why these provisions are required at all in addition
to the many existing rules which are intended to restrict interest
relief in certain situations, including transfer pricing, arbitrage
provisions
and” provisions
of the Finance Act 1996. Both CIOT and ICAEW have concerns about the
Government’s
approach. The
Minister suggested that the proposal was a move towards a more
territorial system of taxation, and he is right: it is only a move
towards that. It has not been fully articulated as the end point. Will
he clarify whether we should move to a territorial system of taxation
and whether the proposal is a staging post along that route or the end
of such movement? If it is a staging post, what does he think the next
moves should
be? There
is a more fundamental concern about the impact of the measures on
businesses. I have talked about compliance costs and about whether
there are other ways to tackle the concern about loading UK-based
companies with high levels of debt. There have been a number of
comments from business and outside advisers about how the proposal will
affect the way in which companies are structured and
financed. The
Law Society has suggested that the proposals might encourage UK groups
to incur more debt; encourage multinationals to transfer assets out of
the UK; discourage inward investment into the UK; put over-leveraged
companies at an advantage over cash-rich companies in making
acquisitions in the UK; and discourage outward investment. I shall
illustrate just one of those points, as it is quite important to
reflect on the potential outcome. We could have a situation in which a
UK-based company is being targeted by two potential acquirers. One
could be an overseas company that is cash rich, but it would seek to
finance its acquisition of the company through intra-group loans.
Alternatively, there could be a highly-leveraged private equity
situation, where there is quite a high level of external debt. Again,
the company in that situation would use debt to finance the acquisition
of the original UK-based
company. The
concern that has been expressed to me is that, because the overseas
parent company is cash rich, it has low levels of external debt or, as
in this case, no external debt. The restriction on debt
interest—the worldwide debt cap—would kick in on that
company. By contrast, if the UK company was acquired by a
highly-leveraged private equity fund that had external debt, the fund
would be able to use debt; it would not face the restriction on the
deductibility of interest that the cash-rich non-UK
company would face. As a consequence, it could borrow more to fund that
acquisition; it could pay a higher price to acquire that other
company. Given that
one of the concerns expressed recently has been about over-leverage in
the markets, we seem to have a situation here whereby the proposed
measures could encourage more leverage, rather than encourage companies
to have significant cash resources, whether those resources are
acquired through the retention of profits or through arranging money
via share issues. The behavioural issues are causing some concern to
outside bodies, and this could be an opportunity for the Minister to
explain the Treasury’s view.
As I
understand it—I am sure the Minister will correct me if I am
wrong—we are the only country that has introduced a worldwide
debt cap. Other jurisdictions have considered introducing some cap on
tax deductibility debt within their own jurisdiction, but not outside
it. Deloitte
suggests: “The
introduction of the debt cap cannot be regarded as a move which will
enhance and support UK competitiveness and this aspect of the policy
design of the debt cap seems more likely to damage the UK’s
competitive position than to enhance
it.” Is
the Minister prepared to comment on that assessment?
The second
issue that I want to touch on relates to the compliance cost. I alluded
to the fact that purely UK groups would also have to go through the
process of calculating what their external financing is, even though
they do not have any non-UK business. As I understand it, the problem
is the gateway test that has been used. When the measures were
originally consulted on, it was suggested that there would be a number
of gateway tests, one of which would enable a purely UK group to avoid
going through that process of calculating external finance. Will the
Minister explain why there is to be only one gateway
test? The
Chartered Institute of Taxation suggests that the reason why there is
only one gateway test is our old friend, EU law, which we discussed in
relation to the last schedule. It was said that EU law aims to ensure
that the arrangements are waterproof and free of the possibility of
legal challenge, which would mean that we will end up putting an
additional burden on UK-only groups that should not really apply, given
the nature of the debt cap rules. I should be grateful if the Minister
explained why we have only one gateway
test. Three
themes run through the general commentary on the measure. First, is it
the best way to tackle the issue of the upstreaming of loans into the
UK? Secondly, is the compliance cost too great? That partly links back
to the fact that there is only one gateway test, which means that
UK-only groups are caught by the measure. Thirdly—the problem
that exercises a number of people—the measure could perversely
lead to companies taking on more external debt, but would be to the
detriment of inbound investment into the UK and perhaps outbound
investment,
too. Mr.
Mark Field (Cities of London and Westminster) (Con): I
echo the words of my hon. Friend in introducing the subject. I ask the
Minister for an indication of the Treasury’s broader thinking.
No one can dispute that it is quite acceptable at times to utilise the
tax system to incentivise or disincentivise certain behaviours.
However, my concern is that the worldwide debt cap that has been
put in place in the whole regime, rather short-sightedly, simply reacts
to the specific economic problems of today, instead of looking at the
long-term future.
We have a
Finance Bill every year and I suppose that it is quite legitimate for
any Government on a short-term basis to put such a regime in place to
deal with the problems of the day, which can then be done away with in
a year or two’s time, but the proposed regime obviously adds an
extra layer of complexity, not least because the worldwide debt cap
applies to global companies—companies with significant interests
here in the UK, but which also have operations overseas. Given that it
is a worldwide debt cap, I would be interested to have some indication
from the Treasury as to precisely what negotiations have taken place
with other countries and whether the measure is part and parcel of a
concerted international process.
I
worry that the measure may have been put in place because of the
present problems. I accept that the genesis may not lie in September
2008, but may be found a little bit before that. That raises the
obvious question that my hon. Friend mentioned in relation to the
private equity industry. In many ways, we have seen a skewing of the
tax system over the past decade or so: extremely low tax rates have
made the putting of debt on to the balance sheet a much more attractive
proposition. We are moving away from that now, and the Minister will
rightly point out that, in the present climate, he wants to
disincentivise having a hell of a lot of debt on the balance sheet.
That may be an academic point, because I suspect that many private
equity providers will not be able to get that much debt on their
balance sheet, even if they want to. Many private equity players have
problems, but because of the lack of liquidity they are trying to raise
relatively small sums of money for debt-for-equity swaps. That is
probably a more desirable way to run those businesses in the longer
term.
Above all, I
am keen to know what the Treasury’s broad thinking is. Is this a
short-term measure given our specific problems at the moment, or is it
part of a longer-term regime to incentivise longer-term behaviours in
relation to
debt?
Dr.
Pugh: I rise to be constructive about clause 35 and the
schedule that follows. It seems to be about the understanding of
complex companies and their financial footprint. That is highly
desirable. It ensures that profits are appropriately taxed and placed.
It ensures that parent companies are identified. It is not always easy
to find the parent company of a subsidiary. It is also mindful of the
need to avoid double taxation. It is an exceptionally difficult area.
The difficulty is well illustrated by the number of Treasury amendments
that have appeared since the legislation was put before us. It also
seems to me to be about an area on which most of us cannot directly
comment. It is highly technical. Schedule 15 refers to things such as
staple companies and stranded deficits. It also incorporates a fair
amount of algebra, which other Members may be able to explain, but I
certainly cannot.
12.45
pm It
is also fundamentally about imposing international accountancy
standards fairly rigorously, which I welcome. That is a recipe for
business efficiency. People talk about
tax efficiency as though it is the same as business efficiency, but when
companies such as Amazon export things to Jersey in order to import
them back into the country, one realises that the pursuit of tax
efficiency can be quite different from efficient business
practice. The
arguments and concerns with clause 35 are ones that we will hear in
connection with any clause of this nature. People always talk about
compliance benefits and capital flow. Those arguments are used so often
that it is almost like crying wolf. One wants to know whether there is
any credibility attached to the complaints here. It seems that some of
the more vocal people voicing these concerns are those who are prepared
to pay huge sums of money on tax advisers. Surely that could go some
way towards meeting the client’s
costs.
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