Finance Bill


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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—
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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