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

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

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Photo of Mr Hugh Wilson Mr Hugh Wilson , Truro 12:00 am, 28th May 1952

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.