Mr.
Timms: On a point of order, Mr. Hood. I am
concerned that I may have become somewhat confused in the measures that
we have just taken. My advice to the Committee would not be to accept
amendments 57, 58 and 60, as I said
earlier.
The
Chairman: The amendments to which the Minister refers were
not taken.
Mr.
Timms: I am grateful for that, Mr.
Hood.
The
Chairman: I appreciate the Minister’s
gratitude.
Question
proposed, That the schedule, as amended, be the Fifteenth schedule
to the Bill.
Mr.
Hoban: Not wishing anyone to think that I had exhausted
schedule 15—I have been overwhelmed by the Minister’s
generosity in accepting some of the amendments that I tabled—I
want to explore one or two points that I think are important. The
Minister probably addressed one of them when we debated the last but
one group of
amendments. One
issue about the construction of the measure is the use of the
“available amount” that is defined in part 8
and the “tested expense amount” or “tested income
amount” that is defined in part 7. Calculations of the former
are based on financial statements, whereas calculations of the latter
are based on tax computations. That would not be a problem if there
were a perfect alignment between UK generally accepted accounting
practice and international financial reporting standards and the basis
on which tax computations are prepared. Life would be fantastic if it
were that simple, but it is not, and there are gaps. That creates a
tension when those differences are important in the calculation of
either the tested amount or the available amount.
One issue
that the Minister referred to when we debated the penultimate group of
amendments was deadlocked joint venture companies. One party may have
75 per cent. of the ordinary share capital but 51 per cent.
of the income, but because of the arrangements between the two owners,
there is deadlock, so it does not count towards control when it comes
to the consolidated results of either partner in the venture.
The tested
expense amount is defined as
“the sum of net
financing deduction of each relevant group
company” in
paragraph 52(1), but according to paragraph 68(6), a relevant group
company would be a “75% subsidiary”. The situation is
that the tested amount would include the expenses of a relevant group
company, but the available amount would not take that into account
because of the deadlock arrangements between two shareholders in a
joint venture such as the one I described. I should be grateful if the
Minister could tell us whether that anomaly was resolved by the last
but one group of amendments or whether further work needs to be done to
get the two calculations into
line.
Another issue arises on the same point in connection
with financial instruments by virtue of paragraph 39(2). Where a company
has borrowed in dollars and then swapped the loan into sterling, if
the contract rate accounts for the arrangement of the UK GAAP there
would be a synthetic sterling interest which would be a finance expense
account. However, where the accounts and the arrangements are under
FRS 26 or IFRS, the US dollar interest would be included with the swap
being ignored. Is this the result that is intended here?
Under
paragraph 39(3), where a company accounts for a loan on a fair value
basis, fair value movements are included within the finance expense
account and therefore the tested amount. However, the equivalent
amounts are not included in the available amounts. So a gap—that
is perhaps the wrong word to use in this context—is opening up.
Another issue may arise on partnerships because of the way they are
dealt with and the question
whether they are transparent for tax purposes. It is difficult to assess
how significant these issues are, but I should be grateful if the
Minister could share his thoughts with the Committee on how the
differences between accounting and tax treatment
work. Mr.
Timms: I think that some of the amendments that we have
been debating will address some of the hon. Gentleman’s
concerns. Amendment 137, which ensures that a UK company must be a
member of the group for accounting purposes, would deal with the
problem of deadlocked joint ventures. On his concern about available
versus total calculations, several potential mismatches created by the
different treatment of more complex financial arrangements have been
raised with us. The draft clauses published in December included a
wider definition of finance expenses and finance income which would
have prevented some of those mismatches, but there was a strong view
from businesses that we should remove the impact of foreign currency
adjustments and payments and receipts from derivative contracts from
the debt rules.
I accept that
narrowing the definitions might raise some problems, but I am cautious
about introducing a quick solution to reintroduce other complexities
that we wanted to eliminate. We will continue to look at these,
consulting with interested parties. If we can find suitable solutions,
we can announce additional rules at the time of the PBR which could
take effect from 1 January 2010, although the legislation would follow
shortly
afterwards. Question
put and agreed
to. Schedule
15, as amended, accordingly agreed
to.
Mr.
Bone: On a point of order, Mr Hood. We have just agreed
the schedule: when will Hansard be produced so that we can check
which amendments were accepted? I share the same concern as the Chief
Secretary about what we went through and voted
on.
The
Chairman: I thank the hon. Gentleman for his point of
order, which is really a point of clarification. I have the script in
front of me, and I can assure him that he and the Minister are
wrong.
Clause 36
ordered to stand part of the
Bill.
Schedule
16Controlled
foreign
companies
Mr.
Timms: I beg to move amendment 155, in
schedule 16, page 182, line 32, at
end insert ‘and ( ) in this Act,
section
57(6).’.
The
Chairman: With this it will be convenient to discuss
Government amendment
156.
Mr.
Timms: I am, again, grateful for your
clarification.
Schedule 16
makes consequential changes arising from what we have just agreed to
the controlled foreign company rules designed to stop UK groups from
artificially diverting profits to low-tax territories in order to avoid
paying UK tax on those profits. The controlled foreign company rules
counter this by charging UK tax on the
diverted profits. The controlled foreign company legislation is subject
to a series of exemptions, two of which are the subject of this
schedule. Those are, first, the acceptable distribution policy and,
secondly, exemptions for holding companies. Following the introduction
of an exemption regime for foreign dividends, these exemptions are no
longer appropriate and are
removed. Amendment
155 is tabled to repeal clause 57(6) of this Bill with effect for
accounting periods of controlled foreign companies beginning on or
after 1 July 2009. This clause contains double taxation provisions that
come into effect for dividends paid on or after 1 April 2008, but
subsection (6) will no longer be needed from 1 July 2009 as
the ADP exemption is repealed on that day as a consequence of the
introduction of dividend
exemption. Amendment
156 is tabled to remove a mismatch between the controlled foreign
company and double taxation rules to ensure that there is consistent
treatment of profits arising before and after commencement. Although
scope for abuse does exist, this mismatch is more likely to produce the
wrong result and therefore needs to be corrected. It reflects an
omission that unfortunately did not come to light during earlier
consultation. On that basis, I hope that the Committee will accept the
amendments. Dr.
John Pugh (Southport) (LD): I do not have a problem with
the amendments, but I want to probe the Minister on one point.
Controlled foreign companies, being controlled foreign holding
companies, are obviously a good thing and international commerce
creates sundry types and forms, and various structures will exist
internationally, and that is all to the good. There is a natural moral
distinction between legitimate companies as part of ordinary business
development and illegitimate companies that are set up expressly for
the purpose of tax avoidance. There seems to be a parallel distinction
in schedule 16 between local holding companies, which enjoy exemptions,
and non-local holding companies, which have their exemptions
withdrawn—as is also the case with superior holding companies. I
support that; I support all the changes in corporate taxation that have
been identified by the Minister. The acid test, and it seems a fair
test, is always identifying the ultimate corporate parent or
beneficiary. I
admit that it is slightly tangential, but I would like to ask the
Financial Secretary about the Tesco case. I am not familiar with its
exact techniques, but the Minister will be aware that it set up a
controlled foreign company in Liechtenstein. This was not to avoid
corporation tax, which it was accused of by The Guardian and
which it exonerated itself from, but in order to avoid stamp
duty. Do the provisions in schedule 16 have any implications for such
tax
loopholes? [Mr.
Peter Atkinson in the
Chair]
Mr.
Timms: Mr. Atkinson, I welcome you to our
deliberations this afternoon. I shall respond to the points that the
hon. Gentleman made in my clause stand part speech. I do not think that
the question arises specifically from the
amendments.
Dr.
Pugh: I apologise for that. I thought that we were not
having a clause stand part debate.
6
pm
Mr.
Timms: I am happy to speak more generally about the
schedule, if that would be helpful to the Committee, having moved the
Government amendments as
well. Schedule
16 amends the controlled foreign company rules. The rules work by
apportioning the profits of the foreign subsidiary back to the UK,
therefore subjecting those profits to a UK tax charge. The impact of
the present legislation is limited by a series of exemptions, which are
designed to exclude from charge those foreign subsidiaries that can
reasonably be assumed to exist for reasons other than to divert profits
artificially from the UK. Two of those exemptions are subject to the
provisions of the clause and schedule; they are the acceptable
distribution policy—the ADP exemption—and holding company
exemptions. Following the introduction of an exemption regime for
foreign dividends, those two exemptions from the rules are no longer
appropriate and are therefore
removed. The
acceptable distribution policy exemption applies when 90 per cent. or
more of the foreign subsidiary’s profits are paid back to the UK
as dividends. The premise underlying the ADP exemption was that, as
dividends were taxable in the UK, there was no significant UK tax
avoidance. However, introducing an exemption regime means that most
dividend payments from foreign subsidiaries will no longer be taxable,
so the exemption becomes redundant. The ADP rules are therefore
repealed on 1 July 2009, the same day that the dividend exemption is to
be introduced. Schedule 16 makes provisions for accounting periods
straddling that date to be split into two. That will ensure that
profits accruing prior to the introduction of the dividend exemption
can still qualify for the ADP exemption.
Mr.
Bone: In my copy of the amendment paper, Government
amendment 155
states “line
32, at end insert
‘and”. That
is followed by two brackets
and “in
this Act, section
57(6).” What
on earth do those two brackets mean?
Mr.
Timms: I imagine that those two brackets refer to a
continuation of the numbering system, but I may come back to that
point.
I was
explaining the ADP exemption. I shall now move on to the holding
company exemption. The other exemption that we are reforming is that
for foreign subsidiaries that qualify as holding companies. Generally,
the exemptions allow companies that receive mainly the specified types
of income, and little other income, to be exempt from the CFC rules.
There are different categories of holding companies, depending on the
specified types of income. Schedule 16 removes the superior and
non-local holding company exemptions, as most foreign dividends will
now be exempt. Retaining those exemptions in such circumstances
represents an unacceptable risk to the Exchequer. Groups could abuse
the exemptions by recycling dividends within the group, resulting in
increased amounts of profit and tax on those profits being diverted
from the UK.
To allow
companies time to adapt to the rules, we are introducing a two-year
transitional period. During that time, the exemptions will be available
only in a restricted
form to mitigate Exchequer risk. The transition period will also overlap
with the longer term CFC review, allowing business to consider the
outcome of this change alongside the removal of the holding company
exemptions. Mr.
Hoban: The Minister referred to a transitional period, but
one of the issues that I see being flagged up is that some exemptions
will continue through the transitional period so long as the company
continues to be held within the group and there is no change of
ownership. I can understand the Government wishing to prevent a change
of ownership arising as part of a tax planning device, but in some
cases the change of control will be for legitimate commercial reasons.
Why, in such cases, should legitimate commercial transactions lose the
benefit of the transitional
relief?
Mr.
Timms: The hon. Gentleman is right that the exemption will
be available only in the restricted form to mitigate Exchequer risk
during that two-year period. If I may, I shall reflect on the hon.
Gentleman’s precise question, and come back to him before
finishing. The
local holding companies exemption will be retained, as it is typically
required for commercial reasons and retaining the rules does not pose a
significant risk to the Exchequer.
I think that
I am now in a position to answer the question that the hon. Member for
Fareham asked about whether condition A is too stringent, if I
understood it correctly. The condition means that groups cannot sell
companies defined as qualifying holding companies to another group and
take advantage of the transitional rules. That prevents groups from
buying qualifying holding companies to shelter income from the UK. The
definition of “control” allows groups to move those
companies intra-group so that they can restructure if they
wish.
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