Orders of the Day — FINANCE (No. 2) BILL

Part of the debate – in the House of Commons at 12:00 am on 10 May 1965.

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Photo of Mr Christopher Rowland Mr Christopher Rowland , Meriden 12:00, 10 May 1965

I wish to address myself entirely to one subject which has been already touched on by most of the speakers this afternoon, and that is the effect of Corporation Tax on overseas investment. I believe that the Government's case is that overseas investment is less profitable than investment at home and has been unduly favoured by tax legislation in past years. I think that, if I may say so to my right hon. Friend the Chancellor, in the statements which we have had so far on this subject the Government have been somewhat long on assertion and short on proof. The Times today has already queried the facts and not the opinions on which policy is being based, and I should like this evening to apply a slightly closer scrutiny to this subject than was possible immediately after the Budget. I hope, in doing this, that the Government's case will also be clarified in the reply to the debate tonight. If my criticism is misguided, as the Financial Secretary has already implied that such criticism is, I trust that it will be realised that it is also well intentioned.

There is, I believe, no question that overseas investment under the proposals will become less attractive than home investment. There are three good reasons why this should happen. I will list them in descending order of importance, in my judgment only. I think that first of all it will be desirable for there to be much sterner criteria of profitability applying to overseas investment.

Secondly, I believe it can be argued—I believe that the Chief Secretary himself bases much of his own position on this argument—that it is bad for this country that the tax which is paid on profits made overseas is, in a sense, lost to this country and accrues only to the Governments of the countries in which the companies operate. This is one of the facts of the situation which cannot be altered, but it is an argument which we have to admit has some force: the operation of double taxation relief so far has tended to mean in a sense that the British taxpayer has been subsidising the foreign Government. If, as I believe to be the case, India taxes gross profits at 65 per cent., Ghana, I believe, at 70 per cent., and this compares with a tax in this country of 56¼ per cent. this means that the foreign Governments are allowed to tax more heavily than perhaps they should.

There is another point, if I may be mildly critical of foreign Governments, and that is that it could be argued that overseas investment, in a changing world of very revolutionary characteristics in Asia and Africa, is at risk of expropriation, and it would be foolish to deny that this must have an effect which also we should bear in mind.

The third argument for the Government's policy is that we must to some extent cut down on new investment; but, of course, the main charge against what the Government are doing is that, even if all the arguments I have advanced are overwhelmingly powerful, in fact the effect of the proposals will be not only to cut down new investments but gradually to cut down all existing investments. I think we should try to get some clarity of a simple, factual character into this subject.

It has been said by the Financial Secretary and the Chief Secretary in the Budget debate, and by the Chancellor as reported in The Times of 3rd May, speaking in Manchester, that all that is happening is that the new proposals will remove an existing bias in favour of overseas investment. In fact what is happening is that a position of rough parity between overseas and home investment is going to be moved towards bias against overseas investment, and this is quite different from what the Government are suggesting is the case.

When this was put to the Chancellor by an hon. Member opposite in the Budget debate he indicated dissent—according to the OFFICIAL REPORT. When it was put to him by the Leader of the Liberal Party a few moments ago I noticed that the Chancellor indicated neither dissent or assent. I trust that when I finish he may possibly even indicate assent that that is what the proposals are—not to remove a bias in favour of overseas investment but to institute a bias against overseas investment.

I said that we should have some minimum, factual comparisons to make, and I have been anxious to get a very simple level of comparison. I have found out what the figures are, assuming a Corporation Tax of 40 per cent., Income Tax at 8s. 3d., overseas tax of 55 per cent., which is not a unreasonable average of overseas tax at present, and with a desire by a company to distribute one-fifth of its gross profits in dividends, £20 out of £100. These are arbitrary figures, I must admit, but taking these as assumptions, what do we find the figures produce?

We find that a British company operating in Britain under the pre-Corporation Tax system pays 56¼ per cent. in tax and would retain 23¾ per cent. Under the post-Corporation Tax system it will pay 54 per cent. in tax and retain 26 per cent. I would say that this is something with which all hon. Members will agree as being desirable. The tax will in fact be slightly reduced and retention by the company will have been increased. This is the avowed purpose of the tax. I think that, certainly on this side of the House, we applaud the Chancellor for instituting a policy with these results.

A British company operating overseas—not an overseas trading corporation—at present pays 55½ per cent. in tax and retains 24½ per cent., very similar to the situation existing for British companies operating entirely in Britain, and the difference in tax is only ¾ per cent., admittedly in favour slightly of the company operating overseas. But under the post-Corporation Tax figures the British company overseas, still with this desire to pay one-fifth of its gross profits in dividend, will have to pay 69 per cent. in tax and retain only 11 per cent. So I think the figures show quite clearly that what is going to happen is that the position of rough parity between home and overseas investment will be removed to the very considerable disincentive and disadvantage of the company operating overseas.

If the Chancellor wishes to say that this is the intention, fair enough; but I do not think he should say that all that he is doing is bringing overseas companies into line with British companies. What he is doing is quite clearly making it more difficult for British companies to operate overseas. This is a policy which can be argued, but let it be argued on the basis of the kind of fair figures which, I think, I have given.