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Section four hundred and sixty-eight of the Income Tax Act, 1952 (which restricts certain transactions leading to the migration of a company outside the United Kingdom), shall have effect as if there were left out of that section (a) in subsection (1) the words "unless carried out with the consent of the Treasury" and (b) subsection (4).—[Mr. Mitchison.]
Before this interval about water—I understand that it was about water—I was moving a new Clause relating to migrating companies. The present position, of course, is that under the Section of the Income Tax Act which we seek to amend the consent of the Treasury is required for a company desiring to establish itself abroad, or to transfer, speaking generally, part of its trade or assets or so on abroad under what I may call non-resident control.
The real substance of the transaction is that no non-resident enterprise is to be created in the form of a company or its trade except with Treasury consent. This provision was introduced in 1951, and it became part of the Income Tax Act, 1952. We have been discussing earlier in the proceedings of the Committee something quite different, but substantially intended to deal with transactions broadly of the same character. What we have been discussing is the establishment and treatment of overseas trading companies which will not be non-resident, but will be resident, but will, on the other hand, carry out their business overseas.
That has been put forward by the Government' as a method of dealing with inequalities of taxation and other exceptional difficulties which are said to have hindered overseas trade. The suggestion, in effect, is that if English people desire to trade overseas, the overseas trading company resident in this country will serve the purpose, and will place them, broadly speaking—we agree that it is an experiment—on a fair footing and on a footing of equality with other nationals trading in the countries in question.
For the purpose of this new Clause, I must, of course, assume, contrary to the doubts that many of us hold in the matter, that the Government are right in supposing that overseas trading companies will work, that they will, in fact, enable an English directorate or control of a company resident in England to trade overseas without any undue difficulty. The question is whether, in those circumstances, it remains necessary to keep the possibility of migration, as the phrase is commonly used. In fact, though the consent of the Treasury is required, very extensive general permissions have been given, and as far as I know, on the only occasion when this matter was discussed in Committee, which was in 1952 not very long after the Section had been embodied in the Income Tax Act, the position was that out of 300 applications, probably, as far as I can judge, fairly recent ones, only two had been refused.
In that discussion in 1952, the Lord Privy Seal, who was then Chancellor of the Exchequer, on 28th May of that year, stated in general terms his plans for further facilitating moves of this kind. There is no doubt, of course, that extensive use has been made of migration, and this was obviously before the present alternative was put forward. The matter was considered by the Royal Commission on the Taxation of Profits and Income, in the Majority Report, and I accept its summary of the position about migration. In its Report, the Commission was leading up to the proposition which, while not quite the same as that which the Government have put forward under Part IV of the Bill, was, broadly speaking, on those lines. It was dealing with the difficulties that there might be in connection with overseas trading by British companies, and this is what it said in paragraph 641:
It is said that if such a company"—
and that means a company that retains its management and control in the United Kingdom—
finds the burden of United Kingdom tax oppressively heavy, it can 'emigrate' by shifting the control and management overseas. There are well-known cases of such emigration in recent years.
It refers to the necessity for Treasury consent, which it describes as
an exceptional and, no doubt, temporary requirement
to which it refers later in its Report. It continues as follows:
But even supposing that the management and control of a company can be expatriated at will in this way (in itself a very large supposition) the general interests of the country are certainly not served by any avoidable inducement towards such movements. Once the company becomes truly localised abroad, there must follow some break in a whole series of connections which are valuable to us in the maintenance of our general economy and the prestige which is an element of it—connections with banks and insurance companies, with financial institutions, with makers of equipment and furnishers of supplies, with the sources of recruitment of new staff. And these things are themselves interdependent. There is a natural tendency, for instance, for orders of plant and equipment to go to the country in which the engineer responsible received his technical training. Generally speaking, therefore, the United Kingdom ought to aim at conditions which favour the management and control of overseas business being retained in this country.
The whole object of Part IV of this Bill—and the Government are confident that they have attained the object is just that, to retain in this country the management and control of overseas businesses. The Majority Report says quite correctly —and this was in 1955, about two years ago—that
There are well-known cases of such emigration in recent years.
These cases have certainly not diminished. We all know that some shipping companies, for instance, have moved their control, or the control of some subsidiary companies, to Bermuda. Some have tried to do so and been turned down, and others at the moment, as far as I know, are thinking about it. No doubt they are having a good look to see how Part IV of the Bill works.
It seems to me there are two alternatives. Either the Government have some reasonable confidence in the whole scheme of overseas trade corporations, the scheme which, after all, was at any rate foreshadowed and supported in this Report, or they have not; and if they have that confidence the arguments so neatly and shortly put in that paragraph apply in favour of the overseas trade corporations and they apply against the emigration of companies.
I quite appreciate that as long as there is a question of Treasury control, especially perhaps under a Government who rather hesitate to interfere with big business in these matters, in these circumstances the Treasury might find it difficult to control emigration. No doubt we shall be told that the beginnings of the scheme at any rate were that there were practically no refusals. That is one side of the matter. That is the side of the company.
However, there is another point. That Section 468 of the Income Tax Act, 1952, has as its heading, "Restriction of certain Transactions leading to avoidance of income tax or profits tax." It may be, and the Majority Report rather trends that way, that that is a slightly harsh way of putting it, but it is certainly true that the establishment of a non-resident company in place of a resident one, even if the resident one gets the overseas trade corporation concession in Part IV of the Bill, means a certain loss of Revenue. I hope that the Economic Secretary, if he is going to answer, will give us a little information.
The Lord Privy Seal's statement about only two refusals was made at the end of May, 1952, and although there had been then rather longer experience of the Section in the 1951 Act—and I am not clear whether his figures referred to that as well as to the Section incorporated in the 1952 Act—in any case that experience was quite short. Can the right hon. Gentleman give us any figures as to the numbers of companies that have emigrated with Treasury control since the Income Tax Act came into force, or since some other convenient date such as over the last three or four years? Can he tell us the number of refusals, and the amount of capital movement involved in some general terms? Lastly, and this is a point which I hope very much that the right hon. Gentleman will be in a position to answer, what was the resultant loss to the Revenue of these movements over some convenient period?
The loss obviously must have been substantial, because the Committee is well aware that a non-resident company, even if it is incorporated in this country, is treated for the purposes of Income Tax exactly, or substantially, as if it were a foreign company. Therefore, any transaction of this sort must result in considerable loss of revenue. We on this side of the Committee suggest to the Government that from the broad national point of view, the company, trading, industrial point of view which appealed to the majority of the Royal Commission, these transactions are not satisfactory if an alternative can be found.
If the Government think that the overseas trade corporations will work, then obviously they are an alternative. If the Government think that they will not work, perhaps they should consider whether they ought to proceed with Part IV of the Bill. But, for the purpose of this new Clause, we must assume that the Government believe that they have not put before the country an unworkable proposition.
Secondly, if the overseas trade corporation works and if it is broadly satisfactory to industry, to the companies concerned and those occupied in overseas trading of this sort, then it is obvious that overseas trade corporations will not involve the serious loss of revenue which similar transactions in the form of establishing non-resident companies would be bound to involve. I do not want to be told, nor do the Committee, that, of course, the Clause goes beyond that and covers various devices and various transactions which, broadly speaking, all have the effect of putting something into the nonresident sphere that previously was in the resident sphere. I quite accept that the Government may say, "This is a rather large order. We have not had time to try out overseas trade corporations yet."
To that extent, this is a probing new Clause, but we seriously submit to the Committee that the reasons which made it necessary to allow migration as freely as it appears to have been allowed in the past cannot exist side by side with the establishment of overseas trade corporations, and that the Government ought either to accept the complete withdrawal of migration facilities or ought to indicate that a very different and much more critical line will be taken in future.
I mention one last case because it is nearly, though not exactly, the same. We all know the difficulty about moving shipping companies and the control of ships. Our own mercantile shipping arrangements are a great deal better than those of some other countries. I need say no more. That is another instance of pushing into another country assets or companies, as the case may be, which in the best interests of this country we believe ought to remain here.
The astonishing thing is that Section 468 of the Income Tax Act, 1952, is still on the Statute Book after six years of Conservative rule. This proposed Clause is a repetition of a Clause in the Finance Bill of that year which was denounced bell, book and candle, by the Conservative Party when it was introduced by the Socialists. The right hon. and learned Gentleman the Member for Kensington, South (Sir P. Spens), who speaks with authority on these matters, said that the Clause was so bad—
…and the injury it will do to this country is so great that I believe its influence will be remembered long after the rest of the Budget is forgotten."—[OFFICIAL REPORT, 3rd July, 1951; Vol. 489, c. 2210.]
The present Foreign Secretary said:
…it is definitely going to be a bar to imperial and colonial development."—[OFFICIAL REPORT, 2nd July, 1951; Vol. 489, c. 2050.]
Again one of their leading authorities on economics said:
This Clause is extremely interesting from other aspects beside the legal one, because it is an assessment by the Socialist Government of the fines necessary to keep a joint stock company within the beneficent frontiers of the Socialist State.
Lord Chandos. He continued:
Yet here we have a Clause which, in effect, is going to shut out British enterprise from developing and opening up these resources. The Clause as it stands is one of the most restrictive."—[OFFICIAL REPORT, 8th May. 1952; Vol. 487, cc. 1792 and 1793.]
With respect, Sir Gordon, surely it is in order to make some general remarks about the nature of the Clause? I understood you would allow the discussion to cover that. However, I only wish to mention those statements of the Conservatives as an interesting example of what was at that time thought by the Conservative Party about that Clause in the Income Tax Bill.
The fact is that I believe there are more recent figures about the number of applications than those given by the hon. and learned Member for Kettering (Mr. Mitchison). Up to 1954 there had been 878 applications under that Section, of which fourteen were refused. I join with the hon. and learned Member in pressing the Government to give us more information about the grounds upon which such applications have been refused, and also to give us more up-to-date information about the numbers. After all the talk about the opportunity State and setting the people free surely we have now reached the position when that Section of the 1952 Income Tax Act should be repealed. If there is any truth in what has been said by the Government, they should have confidence that companies will remain in this country. Then was another point about the legal position of directors. That, too, was strongly objected to by hon. Gentleman opposite. If this restriction was necessary then, it is not necessary today, and so we should not be making it tighter today. It is a restriction which should either be lessened or abolished, and I should say abolished. The last thing we want to do is to put a total ban, as is suggested, on any move overseas by any company, even with Treasury consent.
The new Clause proposed earlier in the Committee can be used to argue either way. But at the time Section 468 was passed the inducement to a company to move overseas was the fact that it would thereby avoid certain liability to taxation. That has been reduced in the present Measure and so there will not now be the same incentive to move overseas. I argue that this is an additional reason for doing away with that Section of the Income Tax Act, rather than tightening it up. I ask the Financial Secretary to tell us a little more about the operation of the Section, to recollect the terms in which it was abused by his own party when it was introduced, and to say that, so far from tightening up the restrictions, he will take an early opportunity of abolishing the Section altogether.
The hon. Member for Orkney and Shetland (Mr. Grimond) has made a violent attack upon this proposed new Clause. I would not go as far as he has, although I oppose it
This Clause as drafted seeks to remove any option that the Treasury may have to sanction a move of a company overseas, and it also takes away the power of the Treasury to allow a company which is resident overseas to issue shares or debentures.
On the question whether or not it is necessary to retain the power of the Treasury to allow these things to happen. I would remind the Committee that one of the main objects of the overseas trading legislation is to induce companies to stay here. But what would happen if we removed the power of the Treasury to sanction these matters? Suppose that some country overseas were to issue legislation to the effect that companies operating in a certain industry in that country must be resident there. There we would have a case in which force majeure was applied. If a company were to continue to operate there at all, it would have to migrate from this country. Further, that country might legislate that the resident control had to be in that country whereas under the O.T.C. legislation the control has to be in this country.
In addition, in many countries, although force majeure is not applied, it may be extremely difficult to keep control in this country and it may be necessary for political reasons that the company should go. If we are to retain our interest, there must be this option for the Treasury to allow such a company to go.
It seems to me that the right hon. Gentleman is confusing two things. One is what this Section of the Income Tax Act is concerned with, and that is the transfer from this country to an overseas country of the residence of an existing company. There is nothing in that Section to prevent a company forming wherever it may be—Lichtenstein, Egypt or Kamskatka—
Surely the point is that an overseas trading company is resident in this country, and it may very well be necessary politically for that residence to be transferred.
On the second point, the object of Section 468 of the Income Tax Act, 1952, in laying down that the issue of shares or debentures could not be made by controlled companies overseas without the permission of the Treasury, is to prevent devices for the avoidance of taxation. If that power of the Treasury were removed, such a company resident overseas would be prevented from issuing shares or debentures for the purposes of genuine development. I do not think that the hon. and learned Member had that point in mind in moving this Clause.
I see the hon. and learned Gentleman's object, but the effect of the Clause if it were accepted would be that a company which might be forced for political considerations to migrate could not do so, and therefore would lose its business. Further, the issue of capital for genuine purposes would he prevented.
The hon. and learned Gentleman about the figures. I think there are four prohibitions in Section 468. It is a long Section and it includes this question of shares and so on. The total number of applications has been in the region of 1,700. I have not got the breakdown of the figures, but I think the majority of them are issues of shares or debentures. There have been 28 refusals.
The real merit of this sort of Clause is that it is in terrorem, and the people who might be tempted to try to "pull a fast one" do not try it when this sort of power exists. This power—it is one of the things I look at when I am at the Treasury—is most carefully exercised, and the hon. and learned Gentleman can rely upon the Treasury exercising its good sense in the national interest. I ask the hon. and learned Gentleman to withdraw the Clause, because if passed in this form it would be unduly hampering. Certainly, in the issue of shares and debentures, it might produce some absurd results.
Can the right hon. Gentleman tell us anything about the resulting loss of revenue? Can he say, for instance, whether the recent transfer of residence of companies operating in Trinidad connected with the oil business required Treasury consent under the Section?
I will supply the information to the hon. and learned Member. I cannot give it off the cuff. The question of the loss of revenue would not arise in the issue of shares and debentures by controlled companies overseas. Consent is not given unless it is thought to be in the national interest that it should be given.
Surely, a company could be forced to migrate for other than political reasons. There could be economic reasons also. It is interesting to listen to the comments on both sides now on this problem when we think that in perhaps a few weeks' or a few months' time the question of the European Free Trade Area will arise in the House. Then, where will we stand? As far as I know, two of the principal planks in supporting the programme of the Free Trade Area of the Messina countries is that there should be free movement of capital and free movement of labour.
I can quite see that a lot of small companies in this country would not be able to do the sensible thing and migrate. On the other hand, there are quite a lot of large companies with large resources which could do just that. If they wanted to relinquish business because a considerable amount of competition was coming from abroad, there is nothing to prevent a third party from overseas from buying the control of that business and paying highly for the "know-how" so that it could take the business to a country where the labour was cheap and the facilities were better.
We ought to be very careful about this in saying how much we are going to prevent or how much we are going to allow at this juncture. Without any question, the House will have to make a serious decision about this at an early date. I do not see how there can be a logical European Free Trade Area without the free movement of capital and the free movement of labour.
I am surprised that the Economic Secretary would not give us firm information about the position in regard to the Trinidad Oil Company. I certainly understood that at the time we were assured in a White Paper, for which, I believe, the right hon. Gentleman voted. that permission was both required and given.
I am very glad that the right hon. Gentleman is now clear about the position, because, in view of the very controversial question which led to a Division in the House—in which he took part—it was a little surprising to find that he was apparently quite unaware of what occurred on a previous occasion. I am glad that he had been converted, in the course of the past six years, to an appreciation of the in terrorem advantages of this part of the Income Tax Act which, as was pointed out by the hon. Member for Orkney and Shetland (Mr. Grimond), was not the view of the party opposite during the long night in which we debated this proposal in 1951, when it was introduced into our tax legislation.
Even if the leader of the Liberal Party was more immoderate than the Economic Secretary on this issue, he was also probably more logical. I do not understand that the Liberal Party is so enamoured of Part IV as are the Government and hon. Members opposite. We put down the Clause to express our bewilderment at the conflicting views upon this issue to which we are constantly asked to listen by hon. Members opposite. We have been told for a very long time that it is quite disastrous that for tax reasons we should have companies migrating overseas. We are told that this does great damage to our economy; that it damages our export prospects and our financial prestige, and all sorts of other things.
Even on this Finance Bill we have had that argument put in regard to more than just Part IV. We have heard it in regard to the special treatment given to shipping companies by way of investment allowances. It was then argued that it was desirable to prevent these companies—who are highly mobile by their very nature—from going to Bermuda and other places. In this Finance Bill alone we have had two important and expensive measures brought forward and argued very largely in terms of the desirability of removing the incentive to these companies to migrate, because, we were told, it was vital to our national interests that they should not desire so to do.
Yet, when we debate the Bill in detail, we are constantly told, particularly by the right hon. and learned Member for Kensington, South (Sir P. Spens)—who has been most eloquent on this point—that it is highly desirable in a great number of cases that companies should migrate. We are a little sceptical about the logicality of the Government's position on this issue. What do they want to happen? Do they want companies to migrate, or do they want them to stay in this country? It is not good enough to say that circumstances alter cases and that we must come to an entirely empirical judgment in each case. If we adopt this entirely empirical attitude, where we say that it does not very much matter about general principles, and that the requirement varies from case to case, that is a rather slender foundation upon which to erect Part IV.
We put down the Clause in order to express our dismay at the confusion of argument which seems to us to have come from the Government side of the Committee on this issue. I do not think that even the Economic Secretary, let alone any other hon. Member opposite, has done anything to clear up this confusion of argument which we have heard throughout our discussion on Part IV.
Theoretically, what the hon. Member has just said has a great deal to be said for it, but we must surely look at the facts as they are. As I understand it, the facts are that for a number of years, for tax reasons, quite a number of companies have been migrating abroad. Many of my hon. Friends and many hon. Members opposite think that it is desirable that they should be stopped, if possible, and that we should keep companies in this country.
But we know two things. First, we know that there are already many companies overseas. What will happen to them? We have to realise that they are there. Secondly, as my right hon. Friend said, there are many areas of the world where, either for economic or for political reasons, it is desirable that the control of the companies should be abroad. All I want to do is to accept the facts as I find them and get away from theories altogether. I want to do everything possible to increase the trade of this country.
Acting on the very important principle laid down by the right hon. and learned Gentleman that we should get away from theory and deal with the facts, may I ask whether we can have an assurance from the Government that, as it is the right hon. and learned Gentleman's view that one of the very important reasons which previously made it desirable for companies to migrate has now been removed, the Treasury will take a slightly different view of applications for migration? In that case, may we expect a higher percentage of refusals than the minute percentage that we have seen in the past?