Previous Section Back to Table of Contents Lords Hansard Home Page


Lord McIntosh of Haringey: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 4.

Moved, That the House do agree with the Commons in their Amendment No. 4.--(Lord McIntosh of Haringey.)

On Question, Motion agreed to.

COMMONS AMENDMENT

5

After Schedule 2, insert the following new schedule--

("SCHEDULE
TAX
The exempt period

1.--(1) The exempt period for the purposes of this Schedule shall begin with a day appointed by the Secretary of State by order made by statutory instrument.
(2) If--
(a) an order is made under section 18(5) as a result of which section 18(1)(b) ceases to have effect, and
(b) the Crown ceases on any day to hold any special share provided for under the Corporation's articles of association,
the exempt period for the purposes of this Schedule shall end with that day.
Exemption from tax

2.--(1) The Corporation shall not be chargeable to corporation tax on profits arising during the exempt period.

22 Jul 1999 : Column 1191


(2) The Corporation shall not have a liability to tax by virtue of section 747(4)(a) of the Income and Corporation Taxes Act 1988 (controlled foreign companies) in respect of profits arising during the exempt period.
Residence for tax purposes

3.--(1) Sub-paragraph (2) shall apply if--
(a) the exempt period ends, and
(b) at that time the Corporation would be regarded for the purposes of the Taxes Acts as resident in the United Kingdom by virtue only of section 66 of the Finance Act 1988 (company incorporated in UK).
(2) That section shall not apply in relation to the Corporation at any time during the period beginning with the end of the exempt period and ending in accordance with sub-paragraph (3).
(3) The period shall end--
(a) with the seventh anniversary of the final day of the exempt period, or
(b) if earlier, at any time when the Corporation comes to be regarded for the purposes of the Taxes Acts as resident in the United Kingdom (otherwise than by virtue of section 66).
(4) The following provisions shall not apply where the Corporation ceases to be resident in the United Kingdom by virtue of sub-paragraph (2)--
(a) section 179 of the Taxation of Chargeable Gains Act 1992 (company ceasing to be member of group);
(b) section 185 of that Act (deemed disposal of assets when company ceases to be resident in UK).
(5) In this paragraph "the Taxes Acts" has the same meaning as in the Taxes Management Act 1970.
Groups of companies, &c.

4.--(1) The Corporation cannot be a member of a group of companies for the purposes of Chapter I of Part VI of the Taxation of Chargeable Gains Act 1992 (groups of companies) at any time during the exempt period.
(2) Where a company ceases to be a member of a group of companies by virtue of sub-paragraph (1), section 179 of that Act shall not apply.
5.--(1) The Corporation cannot be a member of a group of companies for the purposes of Chapter IV of Part X of the Income and Corporation Taxes Act 1988 (group relief) at any time during the exempt period.
(2) The Corporation cannot be a surrendering company for the purposes of a consortium claim within the meaning of section 402(3) of that Act.
Distributions

6.--(1) This paragraph applies where the Corporation makes a distribution during the exempt period.
(2) The following provisions shall not apply in relation to the distribution--
(a) section 208 of the Income and Corporation Taxes Act 1988 (exemption from corporation tax);
(b) section 231 of that Act (tax credits).
(3) The distribution shall be treated for the purposes of corporation tax and income tax as income falling within Case V of Schedule D as set out in section 18(3) of that Act.
(4) The distribution shall be treated as equivalent foreign income for the purposes of section 1A of that Act (rate of tax for income from savings and distributions).
(5) In this paragraph "distribution" has the same meaning as it has in the Corporation Taxes Acts by virtue of Chapter II of Part VI of the Income and Corporation Taxes Act 1988 (company distributions).")

Lord McIntosh of Haringey : My Lords, I beg to move that the House do agree with the Commons in their

22 Jul 1999 : Column 1192

Amendment No. 5. It may be for the convenience of the House if I speak to that before the noble Baroness speaks to her amendments, Amendments Nos. 5A and 5B.

We said at the Report stage on 2nd March that we had agreed the principles of a tax solution which would provide the CDC PPP with the required tax efficiency and that we intended to introduce necessary amendments to the CDC Bill at the appropriate time in the House of Commons. I have acknowledged that the appropriate time was late in parliamentary terms and I have apologised for that. Amendment No. 5 was paved by Amendment No. 1.

The overall policy aim of the proposal is to provide the CDC with a level playing field in relation to competitors located outside the UK so it can achieve its goal of investing in developing countries using private capital raised in the context of a competitive private investment market. It does not seek to give the CDC anything more than that.

The key element of the new schedule is that (unless the partnership were to end) the CDC's (and only the CDC's) income and chargeable gains would not be chargeable to UK corporation tax, capital gains tax or income tax. The CDC would remain liable to applicable local taxes as at present and investors in the CDC would be liable to tax on their income and gains according to their own circumstances. It is also intended that where the CDC undertakes activities other than investment (such as investment management) this would be undertaken through a separate subsidiary, subject to tax in the normal way. That is the answer to the point raised by the noble Viscount, Lord Eccles, about fee income.

The provisions of the new schedule and reasons for them are reasonably straightforward. The exempt period in paragraph 1 provides for the exemption from tax to begin on a day appointed by the Secretary of State by order. Our intention is that the exemption should take effect at the same time as the CDC's new capital structure is implemented so that the CDC can start to develop a financial track record on the same basis as it will go to market.

There is always a potential state aids angle in any government sale. We have discussed this informally with the European Commission and we do not consider that either the tax, or balance sheet proposals more generally, will distort intra-Community trade. However, we intend to notify the European Commission of the tax proposals along with the capital restructuring, and any other relevant details, to provide investors with certainty.

The exemption, like the partnership, is intended to be an indefinite arrangement which will remain in place for the foreseeable future. But paragraph 1 also provides a necessary protection in that if Parliament were to decide, under the provisions of Clause 18, that the special share could be redeemed, and it then was redeemed, the exemption would come to an end with the partnership.

Paragraph 2 covers the main substance of the tax treatment. It provides that the CDC's income and chargeable gains will not be chargeable to corporation tax in the UK. The CDC will also be exempt from capital gains tax and income tax (under existing

22 Jul 1999 : Column 1193

provisions of the Income and Corporation Taxes Act 1988) but will be liable to other taxes such as VAT and stamp duty.

Sub-paragraph (2) is a technical provision, necessary because the language used in legislation dealing with controlled foreign companies refers to a charge arising which is equal to corporation tax rather than it being actual corporation tax, so the CDC's exemption would not necessarily cover this.

Paragraph 3 is about residence for tax purposes and would apply only if the partnership had been brought to an end following the redemption of the special share. Although it is not our intention that this should happen, it is not possible to bind future governments. Therefore, it is necessary to make clear now what will happen if the exemption were to end. Investors will require comfort as to what will happen to them in these circumstances since any decision under Clause 18 would be for Parliament alone and not for them.

The paragraph therefore provides for the CDC to have the option to restructure and possibly go offshore without liability to UK tax provided that its central management and control had moved offshore by the expiry of the exempt period and not thereafter. This aims to maintain the level playing field which we are seeking to create for the CDC. The mechanism set out would provide for an orderly transfer without providing scope for tax avoidance.

Paragraph 4 deals with groups of companies. It is designed to prevent tax avoidance by preventing other members of CDC's shifting assets into CDC to avoid tax.

Paragraph 6 on distributions provides that dividends should be treated as if they were coming from an overseas company. This is to prevent investors benefiting from provisions designed to prevent double taxation of company profits, first, in the hands of the company and, secondly, as distributions from those profits in the hands of the shareholders. That would not be appropriate because CDC's profits are exempt in the company's hands.

I understand that the noble Baroness wishes me to comment on her Amendments Nos. 5A and 5B before she speaks to them. Amendment No. 5A would have the effect that CDC's tax exemption would be dependent on the special shareholder being satisfied that the investment policy and business principles had been adhered to. I agree entirely with the thinking behind the amendment. We want them both to be firmly entrenched and adhered to, but we do not think that it is appropriate that this should be done by an amendment to the provisions on tax exemption.

All the advice we have received is that the partnership should be designed in such a way that there is no possibility, and no appearance of any possibility, of ad hoc government interference in the day-to-day functioning of CDC, and that all our requirements should be set out in the partnership documents so that investors have clear knowledge of what they are investing in. We would not wish to allow political discretion, or the appearance of it, over CDC's tax liability, which would

22 Jul 1999 : Column 1194

be the effect of Amendment No. 5A. The special share is the right instrument for protecting and enforcing the investment policy and business principles.

The articles of association contain provisions for the investment policy in Article 51, and for the business principles in Article 52. These are entrenched in the articles of association and can be changed only with the consent of the special shareholder, the Secretary of State. That in turn requires the approval of Parliament. The content of the investment policy and the business principles is also protected. For investment policy, no change could be made without the approval of the majority of the ordinary shareholders and the consent of the special shareholder.

The mechanism for changing the business principles is different. Changes to the business principles could be made only by a majority of CDC's board, that majority to include at least three of the four members of the business principles committee, which is set up to monitor operation of the business principles and review their content and make recommendations to the board. The two directors appointed by the Secretary of State will sit on this committee, which means that at least one of them would have to have voted in favour of the change before it could be agreed.

I hope it will be accepted, therefore, that both the investment policy and the business principles, to which the amendment refers, are already enshrined in the articles of association under the Bill, and that it is better for them to be protected in that way than through an amendment to the tax exemption provisions.

Amendment No. 5B would change "seventh" to "tenth" in the period in which Section 66 of the Finance Act 1988 is disapplied so that CDC could shift its assets offshore. In order to go offshore, a company incorporated in the United Kingdom would normally set up a company outside the UK, in a country with a suitable tax regime, transfer its assets to it and then effect a merger into that offshore company. Because of the nature of CDC's assets, held in a large number of overseas jurisdictions, it could take CDC several years to do that. I imagine that that is what is behind the amendment. But it would not be appropriate to encourage it to be doing so during the partnership, and if it waited to commence the process until after any redemption of the special share there could be a period in which it was exposed to UK tax. So far, I think, we have everything in common.

The proposal is that a rule which says that a company incorporated in the UK is UK resident for tax purposes, under Section 66 of the Finance Act 1988, should be disapplied to CDC for a period of seven years after the end of the exempt period. This means in practice that CDC could initially go offshore by moving its central management and control offshore. It could then shift its assets in the seven year period during which Section 66 was disapplied. CDC estimates that it would take about three or four months to shift its central management and control. This should happen in the notice period for redemption of the special share. The seven year period which we proposed fits in with the average life of

22 Jul 1999 : Column 1195

CDC's investments. CDC is confident that the seven year period would be sufficient to allow for an orderly transfer.

I hope that that gives the noble Baroness the reassurance that she seeks about the detail of this admittedly complex amendment.

Moved, That the House do agree with the Commons in their Amendment No. 5.--(Lord McIntosh of Haringey.)

7.15 p.m.

AMENDMENT TO COMMONS AMENDMENT No. 5

5A

Line 20, at end of paragraph 2(2) insert ("provided that the special shareholder is satisfied that the investment policy and statement of business principles have been adhered to").


Next Section Back to Table of Contents Lords Hansard Home Page