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Mr. Letwin: The charade that we have just witnessed is necessitated by the fact that I must declare an interest. Again, I am not quite clear which, but I am sure that there will be one. Therefore, I am prohibited by the rules of advocacy from moving the amendment. I do not know what relationship my interests have to schedule 31. However, the rules of the House do not let one speculate, so we will, as always, play by the rules.
We did not discuss schedule 31 in Committee and the sole responsibility for that lamentable fact lies with me. I was so concerned with schedule 30 that I did not notice that schedule 31 was on the agenda and failed to leap up in time. However, nothing much has been lost, because the right answer on Report is the same as the right answer would have been in Committee, which is that schedule 31 needs to be no part of this Bill. It is radically misconceived and the Government have just as good an opportunity to remedy it now by accepting the amendment to delete it as they would have had in Committee.
I want to put on the record two critical points. The first is that the Conservative party has no truck whatever with the idea of people being able to construct arrangements for avoiding tax out of controlled foreign companies as a way of going about something quite other than trading business. That is the reason why we introduced controlled foreign companies provisions 16 years ago. There is nothing between us and the Government on the general principle that where a UK company seeks to engage in Bermuda cashbox activities or the like with a straightforward controlled foreign company, that needs to be stopped. The whole purpose of CFC legislation is to stop it. So far, so good.
The second point is that, unfortunately, this is an area of great delicacy and complexity, involving a huge range of different transactions. As a consequence, it is extraordinarily difficult to disentangle entirely legitimate business manoeuvres from tax avoidance manoeuvres. I do not hold it against Ministers or officials that they have made a muck-up of schedule 31 because it is difficult to separate the two matters. However, the fact is that they have made a muck-up of it and, as a consequence, it needs to be withdrawn. That is not to say that some better constructed analogue of it could not come forward next year and do some good in the service of the British taxpayer. This, however, is not that analogue. It is a schedule that does some very wrong things--albeit, I think, unintentionally.
I think that the Paymaster General is aware of some of those things, but she may not be aware of all of them. If she is aware of all of them, I apologise for going through them rather laboriously; but as, if she is aware of them, she should have done something about them, I think I can be forgiven for assuming that she is not. That is the only charitable explanation for the existence of schedule 31.
I wish to draw attention to two problems in particular. The first is caused by a combination of paragraphs 4 and 8 of the schedule, and relates to the 50:50 joint venture. Let us suppose that there are two corporations, one UK-based and the other US-based, each of which holds an interest of more than 40 per cent. and less than 50.1 per cent. of a joint venture vehicle. If each corporation holds an interest of 50 per cent., both will fall into the category of companies holding an interest of more than 40 per cent. and less than 50.1 per cent., and will therefore be caught in the nexus of paragraphs 4 and 8.
I am sure that the 40 per cent. rule is intended to capture certain nefarious tax-avoidance practices--practices unknown to me but, doubtless, known to the Minister and her officials. I do not doubt that such practices exist; nor do I doubt that we should find ways of dealing with them. The problem is that the Minister, I think unintentionally, will also catch an entirely legitimate set of business practices which I consider particularly important.
Let us imagine that the UK and US companies that I mentioned earlier are involved in internet communications, or telecommunications generally. Let us suppose that they operate on the basis of a joint endeavour to provide major multinational customers with voice telephony or data transfer between the US and the UK, and that--not unnaturally--the UK partner seeks to service the UK-based elements while the US partner seeks to service the US-based elements.
A standard voice telephony call along a straightforward transatlantic cable with indefensible rights of user attached has three components. There is the local and long-distance domestic access within the UK; there is the local and long-distance domestic access within the US, which involves two people, or sets of people, picking up their telephones; and there is the transatlantic component.
A perfectly rational business structure to be used in such circumstances--a structure that may emerge from detailed negotiations in the setting up of a joint venture--may be the holding of three "pick and mix" sets of accounts. One may relate to the part of the pool charge that originates from the UK caller, and represents the resource cost of providing the UK domestic section of the call facilities. Another may relate to the US termination. The third may relate to the transatlantic element--and the transatlantic element may be accounted for through a 50:50 joint venture.
It would be perfectly reasonable for that joint venture to be registered in, for instance, the media. We are not talking about a cash box: there is no intention to stuff the system with earnings from the UK in order to collect tax-free interest. The intention is simply to identify a low-tax jurisdiction, for legitimate taxpaying purposes and as part of a legitimate business structure, in which a 50:50 joint venture can be sensibly located--a venture in which the shared part of the call revenue can be placed, and in which the cost of that shared part will be recognised. In this instance, we are talking about the cost of the IRUs on the transatlantic cable and, perhaps, associated transmission equipment.
I have described an entirely legitimate business practice and an entirely legitimate business structure. I do not know whether such things currently exist, although I speculate that they do, and if they do not they soon will. There are many other such cases, some of which I know exist, from personal experience. All those cases will be captured by the intersection of paragraphs 4 and 8. The joint venture that I have described will be regarded as a controlled foreign company, and that is wrong. The Financial Secretary will smile at this, inwardly or outwardly, but the effect of the provision is irrational. Moreover, it is unintentional. At least, I assume that it is; the Bill cannot have been intended to clobber such legitimate business practices.
That is the first defect of schedule 31. I thought long and hard--and, more importantly, tried to persuade experts to do the same, as my capacities in this respect are distinctly limited--about the possibility of tabling specific amendments to deal with that defect, but I am afraid that it defeated us. I think that the structure of the schedule militates against a solution, and that is my first reason for believing that the schedule should be rewritten.
I am mindful of the fact that, as the hon. Member for Kingston and Surbiton (Mr. Davey) said repeatedly in Committee, we do not want to complicate the situation by tabling "right" amendments on top of "wrong" schedules, ending up with a provision that no one understands. I fear that that would be the very result of trying to weave a solution into schedule 31 as it stands. Surely it would be far better to scrap the schedule, and bring it back next year. The amount that the Government will lose as a result of loopholes they have discovered will not be hugely significant in one year. Over time it may prove important, but I am sure that over time a solution can be found to whatever problems the Paymaster General considers to be real--and arise from tax avoidance manoeuvres--without the need to clobber the joint ventures to which I have referred.
I do not know whether the Paymaster General already knows about the problem that I have identified. As I have said, if she does, she should have killed it already. I shall charitably assume that she does not.