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Madam Deputy Speaker: I am in no position to adjudicate on what the hon. Lady or the Leader of the House has said. I suggest that she contacts the Legal Services Office to see if her interpretation is correct.

Mr. Eric Forth (Bromley and Chislehurst): On a point of order, Madam Deputy Speaker. Following these exchanges, could you ask Mr. Speaker whether consideration could be given to providing a routine extension to Question Time to allow time for correction of inaccurate statements by Ministers? It appears that serious inaccuracies are arising frequently in Ministers' statements, and it seems appropriate that they are given an earlier or an immediate opportunity to correct what they have said wrongly to the House. Perhaps Mr. Speaker could consider offering the House that opportunity so that there is not a long delay between the original inaccurate statement and the correction, if we ever get the correction at all.

Madam Deputy Speaker: I am sure that the right hon. Gentleman will appreciate that that is the whole purpose of being able to ask questions and raise points on statements.


Motion made, and Question put forthwith, pursuant to Order [28 June],

Question agreed to.

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9 May 2002 : Column 321

Orders of the Day

Finance Bill

(Clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134, and Schedules Nos. 1, 5 and 38)

Considered in Committee [Progress 8 May].

Clause 89

Controlled foreign companies and treaty non-resident companies

3.9 pm

Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 34, in page 63, line 33, at end insert—

'(iii) has otherwise been resident outside the United Kingdom and not resident in the United Kingdom for a period of three years.'.

The clause would extend the regime for controlled foreign companies—CFCs—to parent companies that emigrate from the United Kingdom after March this year so as to protect the tax profits of their overseas subsidiaries in certain circumstances. Its objective is to prevent the abuses that could flow from the new substantial shareholders exemptions in other parts of the Finance Bill. Non-UK subsidiaries will have to demonstrate that they are not CFCs and will pay UK tax if they cannot meet the exemption requirements.

Will the Economic Secretary tell us how practical the arrangements will be and how the Revenue intends to operate them? Let us suppose that a company that is UK resident or UK incorporated moves its central management to Holland or to Germany—both probably have more attractive taxation arrangements for multinationals—and let us suppose that it has a subsidiary in Hong Kong. That subsidiary might meet the requirements of the equivalent Dutch or German CFC rules, but not those of the UK. As a result, the Hong Kong company might be liable for tax in the UK. That is extraordinary, because a German-resident company could complete UK returns in respect of its Hong Kong subsidiary.

The point should also be made that emigration does not always take place for tax-motivated reasons. In the global world in which we live, the UK obviously needs to be tax competitive to attract and retain the headquarters of multinational companies. The more European Union member states compete, the more that will become an issue, but companies' motivation is not necessarily fiscal.

The clause will treat companies that emigrate as though they are UK tax resident for ever. There is prima facie legal argument that the provision should lapse after a certain period, and the amendment, on the suggestion of legal advice, proposes that the provision should lapse after three years.

The Economic Secretary to the Treasury (Ruth Kelly): I thank the hon. Member for Arundel and South Downs (Mr. Flight) for the measured way in which he moved the amendment. I note that he made general points about the purpose and appropriateness of the clause, so I hope that, by explaining its purpose, I shall be able to reassure the Opposition about the detail and persuade them that the amendment is wholly inappropriate.

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Clause 89 is part of the package of measures that provides for an exemption from tax for the gains and losses made by companies on the disposal of substantial shareholdings. That package is being introduced to enable UK-based companies and groups to restructure flexibly and rapidly in response to emerging global opportunities without facing the prospect of a large tax charge. The clause updates the existing protection against companies artificially leaving the UK and will maintain existing defences against abuse following the introduction of the widely welcomed substantial shareholdings exemption.

The updated protection affects only one specific—and rare—type of company: one that is resident for tax purposes both in the UK and another country but, for the purposes of a tax treaty, is treated as resident outside the UK. In practice, the protection will bite only where the company is treaty non-resident for mainly fiscal rather than commercial reasons—in other words, in essentially contrived, inherently artificial situations in which companies are unlikely to find themselves by chance. When the protection applies, UK companies that have become treaty non-resident through such artificial contrivances will remain within the scope of the UK's CFC provisions in respect of their overseas subsidiaries.

The clause reflects extensive consultation with business in the course of which there was a general agreement that a revenue protection measure was appropriate, although admittedly there was less consensus about the form that the revenue protection measure should take. The approach taken by the clause was adopted after careful examination of alternative options. Its effectiveness will be kept under close review. It will have no application to the vast majority of companies and, in practice, as I have already said, it will affect only the companies that seek to migrate from the UK for mainly fiscal rather than commercial reasons after 1 April 2002.

3.15 pm

The amendment would restrict the continued application of the UK's CFC rules to just the first three years following a migration—whether or not that migration was wholly artificial, and whether or not the substance of the company's operations remained in the UK. Although I understand the concerns that underlie the amendment, I do not think that it represents the right way to address them.

Mr. Flight: If I understand the Economic Secretary correctly, what she says amounts to a three-year period. However, it will operate in the background and is not specified in the clause.

Ruth Kelly: I shall explain precisely how the provision will work in practice.

As I have said, the clause is all about protecting the Exchequer from those companies that would seek to use artificial means to avoid UK tax. I do not think those who have proposed this amendment would wish it to help such companies but, unfortunately, it would. It would enable such companies to indulge in artificial migration schemes at relatively little cost. They would be subject to the CFC rules for just three years after they had put the artificial structure in place and would be free to divert profits from the UK for ever after. The artificiality could, and in most cases no doubt would, remain for ever and, for that reason, I cannot accept the amendment.

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That is not to say that I do not recognise that there is a legitimate concern over companies that migrate for genuine, non-tax-driven reasons. It is helpful that the Opposition have raised this issue as it has given me the opportunity to allay that concern. The clause is not aimed at companies who migrate for genuine, non-tax-driven reasons and will not, in practice, affect them because the CFC rules apply only to companies where one of the main reasons for their existence is to achieve a reduction in UK tax by a diversion of profits from the UK.

I recognise that, although the clause will not affect such companies in practice, compliance with the administrative requirements of the CFC rules might be an unwelcome burden. The answer is not, however, to exclude all companies from the ambit of the clause after three years. The answer lies in finding sensible ways of minimising that burden. I think that we have done that with this Bill. The Inland Revenue already operates a well established CFC clearance system that, in certain circumstances, can amount to an across-the-board clearance for all a company's CFCs. The Revenue has already indicated to business representatives in the constructive consultation period leading up to this clause that it will extend this clearance system, where appropriate, to companies which have left the UK for genuine commercial rather than fiscal reasons.

Indeed, the Revenue has confirmed that, although each clearance application will be dealt with quite properly on its merits, it would envisage such clearances, where appropriate, to be effective for between three and five years. It would also expect them to be automatically renewable thereafter so long as the relevant facts, circumstances and applicable law remain unchanged and the company has laid all its cards on the table. Of course, such clearances are legally binding on the Inland Revenue so long as the company has disclosed all the relevant facts. That should ensure that the clause will not, in practice, affect those companies which migrate for genuine commercial reasons and ensure that any residual compliance burdens for such companies are minimal. At the same time, the Exchequer will be protected against essentially contrived, artificial migrations.

The hon. Member for Arundel and South Downs raised a specific point about how we can ensure that a company will not be subject to the CFC laws of more than one country. Each country has, of course, the right to apply its CFC rules at it sees fit within the constraints of international law. It has always been technically possible for a CFC to fall within the CFC rules of more than one country. The Inland Revenue, however, has published guidance on how the UK's CFC rules will be applied in such situations, and has confirmed that it has encountered no difficulties to date in the application of that guidance. I do not see any reason why this measure should make a significant difference. On those grounds, I urge the House to reject the amendment and to accept the clause unamended.

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