Clause 67 - Expenditure involving crime
Finance Bill
5:45 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
We have not tabled amendments to the clause, although we have tabled a new clause that has not been selected but to which I shall refer briefly. There are some measures in the clause that it is important at least to mention, so that we hear whether the Government are satisfied that the problems that might be raised would be manageable.
Clause 67 stops UK companies receiving tax relief for payments made overseas that would have constituted a criminal offence if they had been made in the United Kingdom. It will largely affect UK companies operating in overseas territories through branch operations rather than through limited companies, mostly in developing parts of the world. However, it may make it prohibitively expensive for UK companies to operate through branches in areas where bribery is standard practice. That is unlikely to
lead to a significant loss of tax revenue in the UK, because most companies whose overseas operations are profitable will operate in such territories through limited companies in order to protect their overseas revenue from being taxed directly in the UK. In addition, it may affect the UK banking and financial services industry, which tend to use branch operations.
We would be interested to know why UK law only is considered to be the appropriate test, and why not criminal activities under local law. Is there an EU angle, in that UK companies operating through branches will be directly affected but those operating through subsidiaries will not? Is a sort of EU freedom-of-establishment principle involved?
Another and not immediately obvious consequence is that UK companies with controlled foreign companies will have to compute UK-equivalent profits after making an adjustment, which could lead to some overseas companies that were not CFCs becoming CFCs. That would obviously increase the administrative burden. It is probably not a major problem, but have the Government thought about it?
The Chartered Institute of Taxation has expressed support for the fight against criminal bribery, but it raises two particular concerns. It points out that uncertainty could arise if a foreign company had a UK branch that came within the scope of UK corporation tax, but a part of the foreign company unconnected to the UK branch paid a bribe that would be criminal under UK law. If, separately, the UK branch made a payment to the head office of the foreign company to cover central costs incurred by the company that benefited from trade with the UK branch, and as the bribe benefited the whole company's business, it could be shown that the management fee paid by the UK branch included a payment towards the bribe made by the foreign parent. Would the UK branch have to disallow part of that payment towards the central overheads? That would lead to an additional compliance burden, but it also raises questions about the UK's claiming extraterritorial and extranational jurisdiction.
The second and more general point is that there is a risk that the payment would be disallowed in several countries, which could result in the possibility of multiple taxation. That is probably a fairly weak point, but similar points could arise with other costs such as business entertainment. I wonder whether the Government have focused on such issues.