New Clause. — (Tax in Arrear by Reason of Exchange Restrictions.)

Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 28th May 1952.

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Subsection (1) of section four hundred and ninety-seven of the Income Tax Act, 1952 (which relates to the remission in certain cases of interest on tax in arrear by reason of exchange restrictions), and subsections (1) of section forty-one of the Finance Act, 1950, shall he repealed and the following subsection shall he substituted for subsection (1) of section four hundred and ninety-seven of the Income Tax Act, 1952:#x00A3 (1) Where the Commissioners of Inland Revenue are satisfied as respects any tax carrying interest under section four hundred and ninety-five of this Act and section eight of the Finance (No. 2) Act, 1947, as amended by section fifty-three of the Finance Act, 1952.

  1. (a) that the tax is in respect of income arising in a country outside the United Kingdom; and
  2. (b) that as the result of action of the Government of that country it is impossible for the income to be remitted to the United Kingdom
the Commissioners shall allow the tax to remain uncollected accordingly."—[Mr. G. Wilson.]

Brought up, and read the First time.

Photo of Mr Hugh Wilson Mr Hugh Wilson , Truro

I beg to move, "That the Clause be read a Second time."

I have deliberately not spoken often in the debates on the Bill because, if I may say so without any intention of arrogance, it seems to me that in the broad picture the Bill is the best that can be done under present circumstances; and many of the Amendments, while no doubt desirable from the point of view of various groups of constituents, would throw out of perspective the general picture of the Bill. The new Clause certainly would not do that.

Hon. Members will observe that the Clause is, in effect, a re-enactment of Section 497 of the Income Tax Act, 1952, without subsection (1, c). The circumstances why, I submit, it is necessary to make this amendment are these. As hon. Members are well aware, for a number of years remittances of profits earned abroad have been very severely limited or delayed in many countries owing to exchange shortages and regulations. British tax, however, is charged on all foreign profits, even if they are not remittable, with the result that when, as is generally the case, profits in restricting countries considerably exceed the permitted remittances, the tax on unremit- table earnings must be found out of remittances from countries which are free, or from sterling resources.

That has most unfortunate results. Any business operating abroad, especially in a number of different countries, must keep adequate resources where they are freely transferable, to be used as need arises; and a company which is conducting an export business must keep a substantial working capital in London in order to finance its export purchases in the United Kingdom over the time lag, which may often be considerable, before it is reimbursed by its overseas buyers.

The effect of draining away the working capital from export trade is quite obvious and the effects of the present United Kingdom tax legislation must be eventually to exhaust trading resources and reserves and sterling in London, and even currency reserves in free countries; and it must result in the concentration of them in the form of blocked profits in countries where they are immobilised. It would be dangerous, if not impossible, in these circumstances for those concerns to carry on.

9.15 p.m.

So we get the absurd position, which now obtains, that the more successful a British concern is in developing its business in restricting countries, and thereby assisting United Kingdom trade and invisible exports, the sooner it will exhaust its sterling resources and its transferable reserves and have to go into liquidation.

That is a most ridiculous situation, and there are only two things that such a company can do about it. The first is to form subsidiary companies, so that only those earnings which are declared for dividend would be subject to United Kingdom tax; but this would mean placing effective control abroad, and reducing potential British invisible exports and British influence in those countries. This, therefore, would be undesirable in the national interest.

The other thing that a company might do in such circumstances is to reduce its business in the restricting countries to the point where the profits are no greater than the permitted remittances. That, also, would be most undesirable from the national point of view, because business once refused is difficult to recover, and the British trade in visible and invisible exports and prestige would be diminished in the process. That form of action would be particularly bad if it was undertaken by British overseas banks, because such reductions in business would only operate against British trade generally, which is financed and facilitated by British banks abroad.

There is, however, a third way of meeting the difficulty. That would be to tighten up the existing law, which is what the Clause proposes should be done. This problem is certainly not new. There have been restrictions on remittances of one sort and another ever since the financial crisis of 1930-31, but it has not become so acute until fairly recently, from 1946 onwards, when the situation has become increasingly critical owing to the simultaneous factors of inflation abroad and larger currency earnings, together with increasingly severe restrictions on remittances of profits, whether due to foreign exchange, shortage, or to Government legislation.

The two Sections which are mentioned in the Clause—Section 497 of the Income Tax Act, 1952, and Section 41 of the Finance Act, 1950—did set out to meet this difficulty, and they provided that where the Commissioners of Inland Revenue were satisfied that tax in respect of income arising in a country outside the United Kingdom, as a result of action of the Government of that country was impossible to be remitted, and having regard to all the other circumstances of the case, it was reasonable that the tax should for the time being remain uncollected, the Commissioners allowing it to remain uncollected accordingly. The provision in both Sections is the same. The difficulty arises, as in so many statutes, when one comes to interpret the word "reasonable."

The Commissioners of Inland Revenue, apparently, do not think it reasonable to allow the tax to remain uncollected as long as there is anything at all to collect from any source whatever, and so long as any source remains from which it can be extracted. Although, for the reasons I have stated, the payment of the tax from working capital in this country is most undesirable in the national interest as reducing sterling resources, that is at present being done and is having a detrimental effect on British trade.

All that the Clause proposes to do is to make mandatory that permissive power of the Commissioners of Inland Revenue. This seems to me to have five advantages. It does not involve any major change in the tax code. It does not deprive the Inland Revenue of their claim on profits when remittances are received. It creates no new loophole for evasion, because the position in this respect is not altered. It can only be applied when the Inland Revenue are satisfied that the profits in question are impossible to be remitted.

Finally, it would be a great help to British trade, and especially to the present trade in South America, which is beginning to suffer heavily from competition from the Germans and the Japanese, and also from the U.S.A., none of whom have tax of a similar kind to our own so that their traders have a definite advantage.

Photo of Lieut-Commander Peter Smithers Lieut-Commander Peter Smithers , Winchester

I support this Clause because it seems to me that the practice of the Revenue authorities is inequitable and doing real harm to our trade, particularly in the markets where we sell manufactured goods. Apparently the view of the Revenue is that when profits are earned in a foreign currency, even if they cannot be collected by the body which earns them, nevertheless they are part of the income of that body, and ought to bear tax.

From what has been said by my hon. Friend the Member for Truro (Mr. G. Wilson) it will be apparent to the Committee that one arrives at a position where a company may be earning money, say in Brazil, which it is unable to send home to this country in the form of profit: therefore, it must use up its resources in this country to pay tax while piling up useless money in Brazil. As a result it soon finds itself without working capital. That is not only inequitable to the people who are entitled to their fair share of the profits, but it also must have a very bad effect upon our trade.

If we look at the pattern of trade in Latin America, to which this Clause is especially directed, we see our principal markets are the Argentine and Brazil. It is those two countries which restrict the sending home of profits, the Argentine to 5 per cent., and in Brazil to 8 per cent. of the nominal capital. Therefore, a quite serious blow is dealt to our trade with those countries. The Inland Revenue say, "We examine every case on its merits, and in hard cases we make allowances." But the practice of the authorities has rendered that concession valueless, because what in fact they do is to wait until there is little prospect of collecting any more revenue at all and then make the concession.

Naturally, by that time the company concerned is in serious difficulty when it comes to competing with foreign companies. If one looks at the pattern of trade in Latin America, one sees that whereas most countries are increasing their sale of manufactured articles—Germany, for example, on a great scale, and the United States and other European countries—Britain lost 10 per cent. of the volume of her exports to Latin American countries last year. One of the principal reasons for that is because British firms are not able to offer credit terms in the Latin American market comparable with those which can be offered by more fortunately placed foreign competitors.

The object of this Clause is to make it mandatory to the authorities to collect tax only on those profits which can be remitted to this country and to satisfy themselves as to the genuineness of the difficulty which confronts the company in question. While, on the one hand, equity is aimed at and the Clause is designed to assist our traders in competing with their foreign rivals, on the other hand a safeguard is provided which requires the authorities to use the machinery at their command to satisfy themselves that abuse is not taking place

Photo of Mr Leslie Lever Mr Leslie Lever , Manchester Ardwick

May I put this proposition to the hon. Member? I understand he is suggesting that until the moneys which have been earned in foreign countries come into the hands of the traders in this country they should not be taxable. Is that his proposition?

Photo of Lieut-Commander Peter Smithers Lieut-Commander Peter Smithers , Winchester

No. What I am saying is that they should not be taxable until the traders are able to remit them home.

Photo of Mr Leslie Lever Mr Leslie Lever , Manchester Ardwick

The hon. Member wants the British Revenue to suffer until the moneys can be remitted home. Yet it would be perfectly possible for a trader here to visit a country there and use part of that money as his expenses in relation to the business, and, when he comes back, charge it against the accounts of his company as a business expense, and therefore reduce taxation in that way.

Photo of Lieut-Commander Peter Smithers Lieut-Commander Peter Smithers , Winchester

I do not think that could happen on a large scale. I think the hon. Member would agree that such evasions must be quite small. It is with that fact in mind that we have put in this mandatory requirement—

Photo of Lieut-Commander Peter Smithers Lieut-Commander Peter Smithers , Winchester

Almost everything is possible. That is why we have put in this mandatory requirement on the Revenue authorities to satisfy themselves.

The objection of the Government, in the first place, is, I believe, that an alteration of this kind would be expensive to the Revenue, as the hon. Member for Ardwick (Mr. L. M. Lever) has just been suggesting. I do not think it would, because the present practice is for the Government to make concessions in certain cases of absolute necessity and there really is very little margin left between those cases where a concession is made and those cases where it is not. The figure must be quite small.

It is said that there is a difficulty in assessing a tax on something less than the profit actually made. That idea arises from an obsolete view of currency matters to hold that profits in a blocked currency in Latin-American countries are equivalent to profits in sterling or in freely remissable currency seems quite out of touch with conditions in the modern world today. It is no use anyone deluding themselves that these Latin-American currencies will become more convertible or more readily remissable than at present.

The third objection to this Clause is that these matters are now before the Royal Commission on Taxation. But German manufacturers will not wait until the Report of that Royal Commission is made. It really is important in the interests of our manufacturers and those who work for them that this matter should be considered at an early date. All who know Latin America will be concerned at the difficulties which our trade faces there; not only the ordinary hazards of trade together with heavy taxation in this country, but on top of that this device, which means that it is not merely undesirable but foolish and dangerous to extend one's trade or to make a good profit.

I ask the hon. Gentleman to look very carefully at this matter and if he is not able to make a concession to us today I hope he will examine his Department as to the wisdom of their policy. So far as I can see it appears to be inequitable to those in the trades concerned and shortsighted in so far as it concerns the export interests of this country.

Photo of Sir Ian Horobin Sir Ian Horobin , Oldham East

1 wish to support what has been said, but, first, I would dispose of what I am perfectly sure was an unintentional misunderstanding on the part of the hon. Member for Ardwick (Mr. L. M. Lever). There is no substance in his point, because if these allowances were duly to be made in reduction of Income Tax liability they could be made now. So there is no substance in his fear.

9.30 p.m.

Photo of Mr Leslie Lever Mr Leslie Lever , Manchester Ardwick

If the currency of the country which it is proposed shall remain untaxed could be remitted here, that currency would have to be sold to the Government.

Photo of Sir Ian Horobin Sir Ian Horobin , Oldham East

The whole point is that it cannot be remitted. Therefore, I do not think that we need go further into that matter; there is no substance in it.

This is really an important question which concerns banking even more than productive industry. The point cannot be too clearly made that there is no question of remission or reduction of tax. There is no dispute about the profits or the tax liable upon them. That is not what is before the Committee. The question arises because in the world as we know it a good many profits are now being earned in countries from which they are, through no fault of the firm or of the Government, not remitted.

Yet, under our tax law, the total liability to tax on the agreed profits is taken from those moneys available to those companies in London. It is that difficulty to which we must address ourselves. Important as it is in many well established productive industries, it has even more effect where it occurs in banking and financial transactions. That is because a large company doing business in one of these countries probably does a large amount of business here or in parts of the world from which it can claim the profits which it has earned. Therefore, the proportion of the drain upon its free resources, if I may so describe them, though inequitable, is not so likely in most cases to be serious.

But in banking transactions the situation can be quite fantastic. The amount of the earnings in this country, in a head office, for instance, can be completely negligible. A large proportion of the earnings, rightly subject to tax, will be found in the countries from which they cannot be remitted. As long as the present Inland Revenue interpretation of their discretion continues, we shall inevitably get the position that exactly those institutions which we all agree should keep themselves liquid, and who should have funds available for any calls upon them in any part of the world, will find themselves more and more in the position that all their resources are tied up in the unremittable areas. The total demands upon them for taxes can only be obtained out of that small section which is freely disposable from one area to another.

That is a simple proposition which presents a real difficulty. I do not think it will be disputed by the Front Bench that it is a serious difficulty. The more these unpleasant habits of preventing the remission of moneys grow, the more serious will be the position of that vital section in which London still has a preeminence in the whole world: banking and similar financial activities. More and more they run themselves into the danger that if they continue these legitimate and important activities upon which so many of our invisible exports depend, and more and more they will be forced into the position of saying, "Dare we be successful?" or, "Dare we run ourselves into the position that we are getting our funds tied up and are ceasing to be liquid as we should be?"

There is no question of the total tax liability. We are not asking for any reduction or remission or anything else. All that is suggested is that where these moneys, through no fault of anybody in this country, cannot be brought into this country and be made available, the tax should remain uncollected and that it should be collected as soon as the money is available. It seems to me a self-evidently equitable proposition which should have the support of all those who wish to see our commercial strength all over the world continued.

I hope that whoever replies to this debate will either accept this Clause or at least say that he will look into the present custom of the Inland Revenue in the interpretation of their discretion.

Photo of Mr Reginald Maudling Mr Reginald Maudling , Barnet

This is undoubtedly a serious problem, to which my right hon. Friend has directed his attention. I have listened with a great deal of interest to what has been said by my hon. Friend. The problem is roughly this: that a company which operates abroad, not through a subsidiary but through a branch, is taxed by the British Inland Revenue on its profits, whether or not those profits can be remitted to this country. Objections are raised to that both on practical grounds and on grounds of principle.

It is pointed out that it may cause a company great difficulties if its London balances are being drawn on by taxation while profits which it cannot use are piling up abroad. That is the practical point. The point of principle is whether it is right to tax the United Kingdom taxpayer on moneys which do not come within his control and which he cannot use in this country. Those are the two main points behind this new Clause.

This matter has been raised on previous occasions. It was raised in this Committee two years ago on a new Clause moved by myself, to which a reply was given by the right hon. and learned Member for Sheffield, Neepsend (Sir F. Soskice). The Government were then good enough to introduce a concession in the law which this new Clause seeks to extend. Broadly speaking, the position now is that if the Commissioners of Inland Revenue are satisfied that profits cannot be remitted to this country by reason of exchange restrictions, and, also, if they are satisfied, taking into account all the circumstances, that it is reasonable, they have the power to let that amount of taxation remain uncollected.

It may be argued that that does not meet in full either the practical point or the point of principle. I have taken note of what my hon. Friends have said about the way in which this is, in practice, being administered by the Revenue authorities. So far as the matter of principle is concerned, there is a strong argument, but I must point out that to make any change in this matter would involve considerable repercussions over the whole subject of the taxation of overseas income and overseas profits. The matter was considered by the Millard Tucker Committee. This is what they say: … we do not think that either of these points, important as they are, are within our terms of reference. … Both are matters "— Those were the two points I have mentioned— which are more proper to be considered by the Royal Commission. I am advised that this problem is being considered now by the Royal Commission. In these circumstances, I say to my hon. Friends that it seems to the Government better to await the Report of the Royal Commission on what is a most tangled, complicated and, I readily admit, extremely important matter before any action of any kind is taken, or before a decision is taken. While I hope that I have said enough to indicate that the Government recognise that there is a point here, and that we have studied it carefully, I ask my hon. Friend to await the Report of the Royal Commission on a matter which is pre-eminently one on which the advice of that expert body will be of great assistance.

Photo of Sir Ian Horobin Sir Ian Horobin , Oldham East

Did I understand my hon. Friend to say that, while awaiting the Report of the Commission, which may be some time, he will look into the possibility of perhaps loosening up the actual practice of the Department?

Photo of Mr Reginald Maudling Mr Reginald Maudling , Barnet

I am sure that my right hon. Friend will be very ready to look into any point which has been put forward by my hon. Friend.

Photo of Mr Douglas Jay Mr Douglas Jay , Battersea North

Is it not a fact that what the new Clause suggests is substantially in accordance with actual present practice in the Inland Revenue under the present Government? [HON. MEMBERS: "No."] If not, to what extent does it go beyond that?

Photo of Mr Reginald Maudling Mr Reginald Maudling , Barnet

There is quite a difference. At the moment, the test is one of hardship, and this means the ratio between the company's resources in this country and its resources abroad. If the company has a lot of money in this country and the profits concerned in the company overseas which are unremittable are smaller in relation to its London balance it is not considered a case of hardship, and the tax is only allowed to remain uncollected where a case of hardship exists. I think that my hon. Friends consider this not as a matter of hardship, but as one of principle.

Photo of Lieut-Commander Peter Smithers Lieut-Commander Peter Smithers , Winchester

Does my hon. Friend appreciate that, by the time the hardship occurs, damage to the trading potentiality of the concern is already inevitable?

Photo of Mr Hugh Wilson Mr Hugh Wilson , Truro

In view of the statement made by my hon. Friend, I shall ask the leave of the Committee to withdraw the Motion. I hope, however, that the attention of the Commissioners of Inland Revenue will be drawn to the practical difficulties which are arising from a too strict interpretation of hardship. I pointed out earlier that it is largely in the interpretation of the word "reasonable" that the practical difficulties arise in trade, particularly in trade with South America, and that is a matter of some concern. I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.