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

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

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Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee 12:00 am, 10th May 1965

Having set this very reasonable standard, it is not unreasonable to expect the company to show that it ought not to distribute even that modest amount. If these companies are ploughing back their profits into new equipment and plant, nobody will require them to distribute them; it is where they are just sitting on them that we act. [Interruption.] Let us see how its gets written into the Bill. Hon. Gentlemen will know that what is said at this Dispatch Box cannot be translated into law; the Finance Bill will translate broadly what I say into Statute in due time.

I turn finally to overseas investment. This will go on. Listening to some of the Jeremiahs on the other side, one would think that overseas investment was to come to a full stop. It will go on at a very substantial pace. The United States has had this system of taxation for years. Overseas investment by the United States has gone up by leaps and bounds. In the last 12 years from 1951 to 1963 there has been 40,000 million dollars of private direct investment by the United States in other countries. If they have managed to do that under this system that I am now proposing to introduce, why is it suggested that overseas investment by British companies will wilt and die?

It will only wilt and die if the investment itself is unprofitable—that will be the test—and there is a certain amount of investment at the margin today which is relatively unprofitable, and only kept alive by very favourable tax treatment. Those who talk about dynamic investment will not claim that we should go on propping up that kind of institution which, in some cases, is not even marginally profitable at the present time but will surely agree that the capital in it could be better employed.

I should like to explain the position. I have to explain it to myself twice a day, and I will put it as I understand it. There has been a lot of exaggeration, so I will try once again to get it over.

Today a company in this country gets relief from Income Tax and Profits Tax for all the overseas tax it pays. It gets relief up to, but not beyond, its full United Kingdom liability. Shareholders are regarded as satisfying their Income Tax liability even though the company has been relieved of all its Income Tax payments. Let us turn to the future. This is an odd position which certainly is not shared by other countries. Companies will continue to get relief from Corporation Tax on overseas tax on direct investment. There will be no change in that up to Corporation Tax rate, but there will be no relief beyond the Corporation Tax rate. Where the rub comes is that Corporation Tax will be lower than the United Kingdom Income Tax and Profit Tax rate.

There will be a larger chunk not set off than there is at present, although even today there are chunks which are not set off. There will be a larger chunk which will arise in those countries where indigenous rates of tax are astonishingly high. Although we hear that we are over-taxed in this country, it is astonishing to hear of countries where the rate is higher than it is here. I leave that on one side. Should the shareholder get the benefit of the tax which is not set off by having it set off against tax on his dividend? The principle of the Corporation Tax is that United Kingdom tax on a United Kingdom company will not be regarded in future as discharging the liability of the shareholder.

The same logic must apply to the overseas company. We cannot expect that tax which is paid by the company to an overseas country should be regarded as discharging the United Kingdom liability of the shareholder. It would make a monstrosity of the system to do so. Because they have had what undoubtedly is almost uniquely favourable treatment throughout the world—I do not swear that there are not one or two countries which have something like this—this would cause a certain amount of hardship. Therefore I have proposed this transitional relief for a period of five years, in the first two years of which the shareholder will be compensated.

Some of my hon. Friends may think that I am being too generous in this respect. The shareholder will be very fully compensated for the first two years, but then the relief will tail off in the following three years.