Mr.
Timms: I beg to move amendment 94, in
schedule 14, page 136, line 30, leave
out ‘apart from’ and insert ‘otherwise than by
virtue
of’.
The
Chairman: With this it will be convenient to discuss the
following: Government amendments 95 to
98. Amendment
46, in
schedule 14, page 139, line 43, leave
out ‘dividend’ and insert
‘distribution’. Amendment
47, in
schedule 14, page 140, line 2, leave
out ‘dividend’ and insert
‘distribution’. Amendment
51, in
schedule 14, page 147, line 30, leave
out ‘expenditure’ and insert
‘territory’. Government
amendments 103 and
104. Amendment
59, in
schedule 15, page 172, line 33, leave
out ‘Part’ and insert
‘Schedule’. Government
amendment
100. Amendment
50, in
schedule 14, page 143, line 20, leave
out paragraph 9 and
insert— ‘9 In
section 806J, after subsection (7)
insert— (8) Sections 806A to 806K
shall not apply to any distribution paid after 1 July 2009 other than a
distribution in respect of which an election has been made under
section 930Q of CTA
2009.”’.
Mr.
Timms: This is a mixed group of Opposition and Government
amendments, all of which address relatively minor drafting points. I
have so far resisted amendments from Opposition Members, but I am
pleased to say that on this occasion I will be urging my hon. Friends
to support the amendments tabled by the hon. Member for Fareham, which
I am happy to accept. [Interruption.]
The
Chairman: Order. Calm down.
Mr.
Timms: I was rather hoping that we might have had a little
oratory from the hon. Member for Fareham in support of the amendments,
but even without the oratory I am happy to accept them and hope that
the Committee will accept the Government amendments as
well.
Mr.
Hoban: Well, I am almost overwhelmed to the point of
speechlessness by the acceptance of the amendments. I just wish that
they were of a more substantive nature, as that would have shown that
the time of change had come after all. They correct drafting errors
where the Government have inappropriately used the word
“dividend” instead of “distribution.”
Proposed new section 930P refers to distributions in the context of
diversion of trade income, but the drafting refers intermittently to
“dividends” and “distributions”, and we
have already discussed circumstances in which either
“dividends” or “distributions” might be
appropriate.
Amendment 51
corrects a different typo: the line should have referred to
“territory”, but currently refers to
“expenditure”. The amendments are fairly straightforward.
I wish I could claim authorship, but someone more eagle-eyed than me
identified the issues. I am grateful to the Minister for accepting
them. Amendment
94 agreed to.
Amendments
made: 95, in
schedule 14, page 136, line 33, leave
out from beginning to ‘is’ in line 34 and insert
‘Any other
dividend’. 96,
in
schedule 14, page 137, line 14, leave
out ‘apart from’ and insert ‘otherwise than by
virtue
of’. 97,
in
schedule 14, page 137, line 17, leave
out from beginning to ‘is’ in line 18 and insert
‘Any other
dividend’. 98,
in
schedule 14, page 138, line 18, leave
out from ‘that’ to end of line 20 and insert
‘does not fall into an exempt class by virtue of
section 930E but would, apart from this section, fall into an exempt
class otherwise than by virtue of that
section.’. 99,
in
schedule 14, page 138, line 46, at
end insert— ‘930MA
Schemes involving distributions for which deductions
are given (1) This section
applies to a dividend or other distribution that would, apart from this
section, fall into an exempt
class. (2) The distribution
does not fall into an exempt class
if— (a) the distribution
is made as part of a tax advantage scheme,
and (b) the following condition
is met. (3) The condition is
that a deduction is allowed to a resident of any territory outside the
United Kingdom under the law of that territory in respect of an amount
determined by reference to the
distribution.’.—(Mr.
Timms.) Amendments
made: 46, in
schedule 14, page 139, line 43, leave
out ‘dividend’ and insert
‘distribution’. 47,
in
schedule 14, page 140, line 2, leave
out ‘dividend’ and insert
‘distribution’.—(Mr.
Hoban.)
Mr.
Timms: I beg to move amendment 100, in
schedule 14, page 143, line 9, leave
out sub-paragraphs (2) and (3) and
insert—
‘() In subsection (3) (as it has effect as
amended by paragraph 8 of Schedule 30 to FA
2000)— (a) before
paragraph (a),
insert— “(za) if
the dividend is received in an accounting period of the recipient in
which the recipient is not a small company, and the dividend is a
relevant dividend, the profits in respect of which the dividend is
paid;’, (b) in paragraph
(a), at the beginning, insert “in a case not falling under
paragraph (za),”,
and (c) in paragraph (c), at
the beginning, insert “in a case not falling under paragraph
(za),”. () After
subsection (3)
insert— “(3A) For
the purposes of subsection
(3)— (a) “small
company” has the same meaning as in Part 9A of CTA 2009 (company
distributions), (b)
“relevant dividend” means a dividend that, for the
purposes of section 930H of that Act (dividends derived from
transactions not designed to reduce tax), is treated as paid in respect
of profits other than relevant profits (see subsection (4) of that
section), and (c) the profits
in respect of which a dividend is paid are the profits in respect of
which the dividend is treated as paid for the purposes of that
section.”’.
The
Chairman: With this it will be convenient to discuss
amendment 50, in
schedule 14, page 143, line 20, leave
out paragraph 9 and insert— ‘9 In
section 806J, after subsection (7)
insert— (8) Sections 806A to 806K
shall not apply to any distribution paid after 1 July 2009 other than a
distribution in respect of which an election has been made under
section 930Q of CTA
2009.”’.
Mr.
Timms: Amendments 50 and 100 centre on the way in which
double taxation relief is given in the rare cases in which a dividend
is taxable. Government amendment 100 deals with the interaction between
the rules in part 9A that apply to taxable dividends and the double
taxation relief rules. If a dividend is paid out of profits that have
been subject to foreign tax, the double taxation relief rules allow the
foreign tax to be given as a credit against the UK tax due on the
dividend to ensure that the same income is not taxed twice. The rules
currently allow a large amount of choice in the specification of the
profits out of which the dividend is paid, which is important because
the foreign tax paid on the specified profits determines the amount of
foreign tax credit available. The distribution exemption schedule
includes an anti-avoidance rule that considers the source of the
profits out of which a dividend is paid. If those profits result from
transactions designed to reduce UK tax, the dividend will be taxable in
the
UK. Since
the Bill was published, it has been brought to our attention that there
is a risk that avoidance schemes might exploit the mismatch between how
profits are specified for the purpose of the anti-avoidance rule and
how they are specified for the purpose of double tax relief rules. The
amendment therefore overrules the usual choice available in the double
tax relief rules. It will ensure that, where a dividend is taxable in
the UK because it is paid out of the profits of tax avoidance, double
tax relief available on that dividend will be calculated by reference
to those same profits. The amendment will remove a significant risk of
tax avoidance exploiting a mismatch whereby a dividend intended to be
taxed would escape any effective taxation.
Perhaps if
the hon. Member for Fareham speaks to amendment 50, I will be able to
respond
later.
Mr.
Hoban: Amendment 50 deals with new section 930Q, which
allows a company to make an election that a particular distribution
that would otherwise be exempt should instead be taxable. The
explanatory notes state that the two reasons why a company might wish
to make such an exemption are
that “dividends
can only be taken into account for the purposes of the CFC acceptable
distribution policy (ADP) exemption if they are subject to
tax” and “it
is possible that exemption could lead to an increased rate of
withholding
tax.” Paragraph
9 of schedule 14 amends the Income and Corporation Taxes Act 1988 to
delete the onshore pooling rules and the rules that allow for relief in
relation to eligible unrelieved foreign tax. The provisions are an
integral part of the credit system of taxation and it is appropriate
that they should no longer apply to dividends following the
introduction of the exemption regime; there is logic in that.
However, a
taxpayer may elect for dividends to fall outside the exemption regime.
Therefore, a corporate taxpayer may elect for a dividend to be taxable
in the UK if it is paid by a company resident in a territory with which
the UK has a double tax treaty. The provisions that reduce or eliminate
foreign withholding tax apply only if the dividend is subject to tax in
the UK—the sort of scheme where one might want to have a taxable
rather than an exempt dividend. The expectation is that where people
take advantage of that election, they should also be able to take
advantage of the existing rules on onshore pooling and the use of
eligible unrelieved foreign tax. Amendment 50 would enable people who
take the election under new section 930Q to take advantage of the rules
on onshore pooling and the use of unrelieved foreign
tax.
12.15
pm
Mr.
Timms: A principal purpose of the legislation is to
simplify the process of paying dividends to the UK. Amendment 50 would
retain a significant body of complicated legislation on onshore pooling
rules. I hope that I can persuade the hon. Gentleman that it would do
so with little, or possibly no, benefit. It would retain the onshore
pooling rules solely for the benefit of those dividends that a company
elects to be taxable. Why would a company do that? The two most likely
reasons are to obtain lower rates of foreign withholding tax and,
during a transitional period, to allow dividends to qualify for the ADP
exemption from controlled foreign company legislation, which we will
come to
later. Although
the onshore pooling rules can apply to withholding tax, by far their
main application is in connection with underlying tax. It is rare that
dividends that qualify for underlying tax credit also suffer
withholding tax, because intra-group dividends are generally exempt
from such taxes. ADP dividends are in all cases excluded from onshore
pooling. It is not justified to retain onshore pooling and the
significant amount of legislation on that for that very limited
purpose. The rules were introduced in 2001 to balance the introduction
of the so-called
mixer cap. That need has been removed by dividend exemption, so the
rationale for the onshore pooling rules will end as well. I hope that
the hon. Gentleman feels that he can withdraw his
amendment. Mr.
Hoban: The Minister has given a satisfactory explanation
and his point about the change to the mixer cap arrangements suggests
that the onshore pooling arrangements are no longer necessary. Although
I have not moved amendment 50, when the time comes I will not press it
to a Division.
Amendment
agreed to.
Amendments
made: 101, in
schedule 14, page 144, line 24, leave
out from beginning to ‘modification’ in line
32 and insert ‘modification. (3B)
The’. Amendment
102, in
schedule 14, page 145, line 36, leave
out from ‘following’ to ‘modification’ in
line 44 and insert
‘modification. (4B)
The’.—(Mr. Timms.)
Amendment
made: 51, in
schedule 14, page 147, line 30, leave
out ‘expenditure’ and insert
‘territory’. —(Mr.
Hoban.)
Amendments
made: 103, in
schedule 14, page 148, line 28, leave
out ‘apart from’ and insert
‘otherwise than by virtue
of’. Amendment
104, in
schedule 14, page 148, line 37, leave
out ‘apart from’ and insert
‘otherwise than by virtue
of’.—(Mr.
Timms.) Question
proposed, That the schedule, as amended, be the Fourteenth schedule
to the
Bill.
Mr.
Hoban: I want clarification on some of the technical
aspects of the schedule that we have not touched on. The schedule comes
into effect on 1 July 2009, which is slightly odd. It will be difficult
to do given that the Bill will not receive Royal Assent until after
that date, but that is how we are making tax policy. There have been
concerns about the impact of that date. Does the commencement date make
it more difficult for foreign companies to meet the acceptable
distribution policy?
The proposed
changes to the Corporation Tax Act 2009 mean that from 1
July 2009, dividends can only be specified as being paid from the
profits of the current period. When no profits are specified, the
dividend will be treated as having been paid from the profits of the
last period for which accounts were drawn up. That suggests that it be
difficult for companies to qualify for the acceptable distribution
exemption. In addition, a company accounting period that straddles 1
July 2009 will be, as a whole, under the controlled foreign companies
rules. That may end up with CFCs trying to run other exemptions to get
their dividends through.
PricewaterhouseCoopers
suggested that a straddled period should be treated as split only in
cases when a company pursues an acceptable distribution policy in
respect of the first period, or for which an exempt activity holding
company is claimed in the first period but not thereafter. Will the
Minister clarify how the commencement date impacts on companies seeking
to use the existing rules?
There is a
disconnect between the sourcing rules in part 2 and other rules on the
treatment of dividends. Are the rules consistent with the acceptable
distribution policy? Will the Minister comment on the taxation of
foreign permanent establishments, which has not yet been fully
addressed? Where are the Government in that
process?
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