|
Clause 30
Provision not at arm's length: transactions between UK taxpayers
Question proposed, That the clause stand part of the Bill.
Mr. Prisk: We come now to the important, if not easily comprehensible, issue of transfer pricing and thin capitalisation. Clause 30 and schedule 5 change the way in which prices are set between associated businesses for transactions within the United Kingdom. The clause will require arm's-length pricing, and the whole process, of course, will have to be supported by extensive documentation. Committee members will immediately recognise—as I am sure do you, Mr. McWilliam—that that represents, potentially, a huge compliance burden. Given the complexity of UK-UK transfer pricing, I shall give some examples to illustrate my point.
Let us consider head office costs. Most groups of companies do not make arrangements for each and every transaction or transfer between companies to be priced in the manner required by the legislation, so there will be significant change there, in terms of recharging. UK groups often find that it is easier not to charge interest on intra-group loans; or, at least, if they do charge interest, there is no need to charge at market rates. That will have to change because of the clause. Committee members will realise that it could have a significant adverse effect if loans have to be charged on an arm's-length basis within groups, as is required in this and subsequent clauses.
Another example—and a problem that is particularly difficult to resolve—is that of intellectual property. Companies may have to value their intellectual property and start charging royalties to UK-group companies for that use. We can all think of a number of market sectors in which that will be particularly relevant. Examples include oil and gas, and the pharmaceutical industry.
10.54 am
The Chairman's attention having been called to the fact that eleven Members were not present, he suspended the proceedings.
Column Number: 105
11.3 am
Other Members having come into the Room and eleven Members being present, the proceedings were resumed.
Mr. Prisk: One could get a complex. The moment one starts to talk about UK-UK transfer pricing and thin capitalisation, Committee members' attention wanders.
Mr. Pound: So does the Committee.
The Chairman: Provided that my attention does not wander, we will be all right.
Mr. Prisk: Thank you, Mr. McWilliam. I have no doubt that there will be a lengthy and, as always, intellectual discourse on the issue from the hon. Member for Ealing, North.
The hon. Gentleman's attention, and that of the Committee, has been grasped by the question of intellectual property. Companies face the possibility of needing to value their intellectual property and therefore of starting to charge the respective royalties to companies in the group. I tried to refer to that question in relation to the oil, gas and pharmaceutical industries.
To take an example from my constituency area, we have an outstanding research and development facility in the GlaxoSmithKline operation at Ware. In Hertfordshire, and in Harlow in neighbouring Essex, there is a number of related companies within the group.
As we can imagine, one of the problems is the complexity of trying to value the intellectual property developed at the company based in Ware, and establishing whether as an organisation it needs to charge royalties to the other companies for that development and assessment. That is one of industry's worries. Hopefully, the Minister will be able to put minds at rest.
Head office costs, intra-group loans and intellectual property are just three potential elements of a significant compliance burdens that the clause would seek to impose. Therefore, we are talking not simply about another set of files, a little more paperwork or an adjustment to a software program but, possibly, for many organisations, the need to reorganise their structure or to restructure financially how they operate.
Mr. Burnett: I do not want to be unhelpful, but I hope that the hon. Gentleman will deprecate artificial transactions—transactions that artificially invest intellectual property in low tax regime countries.
Mr. Prisk: I am grateful to the hon. Gentleman but that is not the point that we are examining, which is whether the new arrangements in the clause would force organisations to make that change. I understand the situation elsewhere, but the question is whether there is a compliance burden that would otherwise not be expected. That is the essence of my concern.
Mr. Burnett: I take the point that without anti-avoidance provisions on transfer pricing we could have severe leaching, or loss, which is the word that I should use, of tax revenue. The hon. Gentleman is right on the
Column Number: 106
nail when he talks about bureaucracy and if I am fortunate enough to catch your eye, Mr. McWilliam, I will say a few words on that point as well.
Mr. Prisk: I am grateful to the hon. Gentleman. Just when we thought that his smooth tongue was about to ingratiate himself with all of us, he moves us on to a different aspect of his scrutiny capabilities. He is right to highlight the fact that there is a danger of leaching and I will discuss that in a moment.
At the heart of my first point is the potential compliance burden that is a consequence of the change in this clause and related ones. That is why the policy has met with quite a lot of concern among the business community. I fully accept that the Government have made some useful concessions. However, many experts, including the Confederation of British Industry, feel that business needs more time in terms of implementation. I will quote one leading expert in the field. Mr. Steve Hasson, who is the head of transfer pricing at PricewaterhouseCoopers, said:
''It's understandable that the Government wants to put its house in order, but one has to question why they have to put so much pressure on business in such a short timescale. Our clients have voiced their opinion—over 50% would like to see the start date delayed by more than a year.''
That was based on a quite detailed survey of that company's clients in January.
It seems peculiar that companies are being required to produce documentation that would not have been required for any commercial reason. Yet, in many cases, although not all, there may be no additional UK tax at stake. The clauses represent a big administrative outlay and some businesses will ask the question: for what purpose?
I am sure that the Committee will wish to consider the background to that, which is the Inland Revenue's concern about the possible implications for the sustainability of UK tax law following the decision in the Lankhorst v. Hohorst case at the European Court of Justice. Many experts have informed me, both from the taxation and from the legal point of view, that the Inland Revenue has been advised that it would not be possible to return to what I think is termed a direction base regime without the threat of action for non-compliance with EU law at the ECJ.
Will the Paymaster General tell the Committee what her understanding is of such a potential challenge? Is she certain that the proposed changes in this and the related clauses, and in schedule 5, and their implementation will not also be open to challenge? There seems to be considerable expert opinion that devising something that is not open to challenge will be extremely difficult. Obviously, the key element is the question of discrimination. I am sure that she will want to respond.
Many representative bodies have highlighted that the United Kingdom's approach is the equivalent of what I believe is termed downward harmonisation. I refer briefly to the view of the Institute of Chartered Accountants:
''Our concern is that this will reduce the competitiveness of the UK and is not consistent with the stated EU Lisbon Agenda''—
on which the Chancellor is keen—
Column Number: 107
''which is to create in Europe the most dynamic knowledge-based economy in the world by 2010.''
The Confederation of British Industry stated in a briefing that it supplied to members of the Committee that it is
''very concerned that the measures on transfer pricing and thin capitalisation are being taken forward too quickly, and in isolation from other aspects of the corporation tax system such as group relief which are similarly potentially subject to intervention by the ECJ.''
The CBI goes on to an important related point:
''As the issues arising from ECJ decisions are so inter-related, it would have been much better to take more time to devise a coherent holistic approach to addressing incompatibilities between the UK corporation tax and the EU treaties.''
It then deals with other aspects, but I shall not stretch your patience too much with the broader questions, Mr. McWilliam.
The point is that other EU countries have taken different approaches, some of which have merit, some of which do not. Spain, for example, has chosen to disapply its thin capitalisation and related provisions for all intra-EU transactions. Can the Paymaster General explain her Department's views on alternative approaches? That would help inform us as to the basis, or the foundation, of the clause.
Mr. Burnett: I do not want to make too contentious a point. Nevertheless, I noted the comments in briefings on the Bill about the attitude of the Spanish. I am concerned that that approach, if adopted, would accelerate the trend to European Union tax harmonisation, which I would personally deprecate. In addition, does the hon. Gentleman agree that courts would give some weight to the steps taken by the Spanish Government and that EU courts are already encroaching far too much, especially on our corporation tax?
Mr. Prisk: I can understand why the hon. Member for Torridge and West Devon is not with his leader at his party's launch of its European election campaign today.
| 
