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9.30 pm

Dawn Primarolo: May I ask the hon. Gentleman not to read from the document selectively? The senator whose statement to the Jersey Parliament the hon. Gentleman is talking about referred to the fact that discussions went on between Jersey and the United Kingdom for some two years.

Mr. Flight: I am aware of that, and I will be referring to those discussions, which went on for some time. I am sure that the Paymaster General may be able to elucidate a little further what those discussions were about. In commonsense language, as I understand the situation, there were discussions with the various dependent territories, particularly with regard to exempt companies; the Jersey authorities were less co-operative than the Guernsey and Isle of Man authorities and sought to negotiate terms, because the administration of companies forms a larger proportion of the Jersey gross domestic product than it does elsewhere.

Dawn Primarolo: Perhaps the hon. Gentleman would like to explain whether his speech is intended to defend the UK interest, or Jersey's interests.

Mr. Flight rose

Sir Teddy Taylor: Before my hon. Friend responds to that intervention, will he point out that Jersey has no representative in the House of Commons to speak for it?

Mr. Flight: I will come to the UK interest, but it is important to raise the matter, partly for the reason that my hon. Friend has mentioned and partly because in some senses the British dependencies are part of British interests. If, as a result of clause 88, we end up damaging our own self-interest, that will not be particularly sensible. [Interruption.] May I continue? It is healthy that this matter should be out in the open, particularly where, for some reason, what appeared in the press, particularly the Financial Times, was far from what the matter was all about.

The Paymaster General's discussions with Jersey were also about what the Organisation for Economic Co-operation and Development has been concerned with in the territories. It is interesting to note that roughly a year ago the United States Government changed policy and broadly made the point to the OECD that it was not entirely proper to over-interfere in the internal tax affairs of sovereign states. I would be interested to know whether

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the United States change of policy was acknowledged by the Government here, and what the opinions about that were.

To deal with the Jersey matter, my practical point is that it is in the UK's interest, no matter how difficult it may be, to resolve British policy objectives directly with Jersey. It is unfortunate that the resulting power that the Paymaster General has introduced in clause 88 does not relate specifically to the Government's disagreement with Jersey. It has a much wider application.

I realise that the Paymaster General may seek to talk about precedent, but as I said at the outset, under clause 88, a UK-based multinational will face the arbitrary possibility that the exemption rules applying to controlled foreign companies, on which basis it may have structured itself, could suddenly change if the Government choose to use the powers in clause 88. As a result, its CFC exemptions would be suspended.

The amendment would provide a cooling-off period, and introduce the concept of giving six months' notice of an intention to bring forward such legislation. One hopes that that would force agreement between the UK and the relevant dependent territory, and it would also enable UK-based multinational companies to examine their global structure and to change it, having been given notice of such legislation by the UK Government.

I finish by returning to the Jersey issue, and Jersey's response—as I understand it—to the Paymaster General, following the famous telephone conversation in which Jersey was required to commit. The key clause states:

It would be in the UK's and London's interests if the UK and Jersey could reach an agreement here. It is unfortunate that the Government have resorted to the instrument constituted by clause 88, which has a wider application than merely the specific discussions with Jersey.

Mr. Edward Davey: I rise so that we can return the debate to amendment No. 26. I have some sympathy with it, but its implications have not been explored in recent moments.

The explanatory notes and Budget press notices do not offer sufficient explanation of, or justification for, clause 88, so the Government need to offer some. The Committee needs to be aware that it would empower the Treasury to make regulations that would affect companies' commercial

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decisions overnight. One assumes that such regulations would not be retrospective, and it would help if the Paymaster General could confirm that.

Mr. Flight rose

Mr. Davey: I shall give way to the hon. Gentleman, provided that he is not going to talk about Jersey.

Mr. Flight: I did make the point that the measures would in effect be retrospective. If a group has a structure or its CFCs in a certain jurisdiction, but it is suddenly decreed that CFC exemptions are not valid there, that is effectively retrospective.

Mr. Davey: The hon. Gentleman is redefining the term "retrospective" with that argument. It is a concern, but not in the way that he suggests. My concern is that the clause gives the Government the opportunity to produce an instrument to change the rules on CFCs at any stage during the financial year. Governments in the past have been able to do so every year in the Budget and the Finance Bill. Every year, the Government get their sticky fingers on the tax statutes and change the law. All companies and individuals know that the tax regime may change in the next financial year. That degree of instability is built into the system and we cannot get around that unless we stop having annual Finance Bills. That might be a good idea, but I would be ruled out of order for pursuing it. However, the clause would build in extra instability over and above the annual Finance Bill. That is the concern, and the Government have yet to make the case that the power is necessary between annual Finance Bills.

Sir Teddy Taylor: I hope that the Minister will reconsider this important issue. This clause does not mention the Channel Islands, just as the previous clause did not mention Taiwan. I had the pleasure of having breakfast in Portcullis House last week with senators from Jersey who explained their concern about the provision. I should point out that I paid the bill, so there is no question of anything unusual.

The senators had several concerns. The Minister will be aware that it has been widely reported—the senators who spoke to me confirmed it—that those involved had been told to agree to the code of conduct, lest economic sanctions be levied against them. I am sure that the Government will deny that shameful behaviour. However, the clause contains unusual wording that would horrify Members, especially Labour Members who claim to believe in democracy, if they read it. Clause 88 states that regulations may be introduced that

In other words, there might be one rule for Jersey and another for a different country. That should worry us all.

The regulations may also

So we would be giving the Government a blank cheque to introduce whatever measures they think fit, subject to the approval of regulations. They could bring in different rules for different countries or places.

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I hope that the Minister will accept that the Channel Islands have some of the highest standards of financial operation to be found anywhere in the world. We had a recent report on money laundering in which the Channel Islands were not even mentioned as being suspected of involvement. The Channel Islands are also the second major source of capital for London finances. Surely the Government should be concerned to try to preserve that.

As the Minister is well aware, the code of conduct that she initiated in the EU, among all the nonsensical talk about a withholding tax—it cannot happen unless Britain agrees to it—has meant that we are stuck with forcing the Channel Islands to do something that they do not want to do. It will be much against their financial interests. If the Minister doubts that, she should speak, as I have, to senators from Jersey who are very concerned, worried and alarmed. The Minister may argue that the people of Guernsey are not suffering, but she will probably know that they have a very different sort of business from that carried on in Jersey.

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