I can only say that the Chief Secretary's reply to the Amendment, which was moved in very persuasive terms by my hon. Friend the Member for Mid-Bedfordshire (Mr. Hastings), is disappointing in the extreme, because it was so much less forthcoming than the replies on the same point raised in previous years.
I remember that last year, at about a quarter-to-four in the morning, as the cold grey light of day was beginning to come through the windows of the Chamber, I moved the Amendment to which my hon. Friend referred, and it was replied to by the Financial Secretary on 21st June, reported at column 534 of the OFFICIAL REPORT. Unlike the Chief Secretary tonight, who has attacked the matter on an issue of principle, the Financial Secretary on that occasion gave three reasons why he could not accept the Amendment.
I had argued it principally in relation to British banks operating overseas, though the Amendment was not so limited. He said that it was not right to single out one particular business, and I accept that that is right. He made the point that this would increase the incentive to invest in low-tax countries, and he also said that it would reduce the disincentive to invest in high-tax countries. Indeed, one is the other side of the same coin.
The Financial Secretary also referred to the now well-worn theme that it could lead to tax avoidance, but on that occasion he said:
I do not want to make too much of this."—[OFFICIAL REPORT, 21st June, 1966; Vol. 730, c. 534.]
My hon. Friend has not sought special treatment for any trade. The matter is argued generally. Obviously, it affects a large number of businesses which operate in a number of countries overseas. Were we to raise the matter on the rather practical grounds of the Financial Secretary, we would be left with only the economic effect, namely, that this would have a marginal impact on overseas investment. Perhaps I may be allowed to say a word or two about that, because the Chief Secretary gave it as one of his reasons.
In 1965, the Financial Secretary admitted that we had a case. My hon. Friend has quoted from the Report stage debates, when the Financial Secretary indicated his view that there was substance in the case if means could be found of giving expression to it. The question which one must now ask is whether the impact on overseas invest- ment—the encouragement to go to a low-tax country or the reduced disincentive to invest in a high-tax country—is now so great in relation to our total overseas investment that it cannot be tolerated. Are we reduced to such a pass that the marginal effect which might arise, which would be necessary to give rise to the justice which was then admitted, cannot be borne?
Nobody has ever disputed in relation to overseas investment that the short-term curbs could well be justified in a moment of balance of payment crisis as a means of temporarily staunching the flow of investment overseas. This has received qualified—I emphasise "qualified"—support from the Reddaway Report, to which my hon. Friend referred. It should be noted that unlike many commentators on this matter, I am quoting from the Reddaway Report and not from any of the handouts about it.
At page 131, the Reddaway Report states:
A restriction of direct investment overseas would, for a considerable time, make a contribution to the problem, but it does not follow that it is a wise policy: the most that one can do is to make the rather tautological remark that, if nothing else is considered feasible (or adequate without the restriction on direct investment overseas), then the policy may be better than the last resort—which is economic stagnation.
I forbear from pointing out that we seem to have managed to get both from the Government.
The whole tenor of the Report—I was astonished by what the Chief Secretary said in his brief reference to it—is that long-term curbs, restrictions and disincentives are harmful to the economic interests of the country. I will not read the full page, but perhaps I might read the two paragraphs which deal with this. I quote from page 130 of the Reddaway Report:
An average act of direct investment overseas will strengthen the future balance of payments on current account, even after deducting the interest payable on the overseas borrowing … by which, at least from the national point of view, such an act of investment is almost wholly financed. In consequence, a steady rate of direct investment overseas would, if maintained long enough, provide enough of an annual surplus on current account to finance the annual quota of new investment.
Perhaps one of the most factual conclusions of the Report was that over the
period which it examined, from 1954 to 1965, that was exactly what happened: overseas investment was self-supporting.
The Financial Secretary is not present, but I raised the question of long-term restrictions in the Budget debate. The Amendment seeks to modify in a small regard the long-term fiscal disincentives on investment. I raised the question of what the Reddaway Report showed. I used different words but with exactly the same meaning. In the Budget debate, the Financial Secretary said that
if, as a result of this Report, anybody has to swallow his words spoken two years ago, it is not anyone on this side."—[OFFICIAL REPORT, 13th April, 1967; Vol. 744, c. 1499.]
The Chief Secretary echoed those words tonight when he said that it wholly bore out what the Government have been saying. That is not the conclusion of most of the responsible commentators on the matter.
The Financial Times said on 29th March of this year:
… the Government can take little comfort from a report whose findings by implication condemn the approach adopted by Mr. Callaghan.
The Economist said:
Measured by the Reddaway yardstick, the indiscriminate and permanent tax disincentives to foreign direct investment written into the 1965 Finance Act seem to be folly.
Those are remarks by the two principal commentators on the matter, and for the Government to claim that the Reddaway Report bears out their policy of long-term, permanent fiscal disincentives to overseas investment seems to be the height of folly.
Now we have even the National Economic Development Council considering the Reddaway Report. The Times reported on 6th April:
Overseas investment is a good thing in the long term, the National Economic Development Council decided at its monthly meeting yesterday. But while they felt it was generally the right course for a country like Britain to take, Neddy members agreed that short-term limitations during a balance of payments crisis were unavoidable.
But we are not discussing short-term limitations. We are discussing a long-term, built-in financial disincentive to overseas investment.
The new dispensation of Corporation Tax and the limitation of double tax relief operates particularly harshly on those companies which have investments in a number of different countries. That is the situation which we are discussing. The Amendment undoubtedly would mitigate the harshness in allowing the taxation which is unrelieved from profits earned in low-tax countries to be relieved against the balance left from the high-tax countries. That would seem to be a perfectly reasonable proposal, but the Chief Secretary has told us that it is wholly contrary to every principle which has already been written into the taxation system. I hope that I do not misquote him. I understood him to say that this was not what the taxation system sought to do.
My hon. Friend the Member for Mid-Bedfordshire has pointed out very pertinently that the taxation system of the country which the Government purport to take as their model—the American system—does just that. If industry is having to compete in overseas countries with American industry, clearly it is competing subject perhaps to a minor but none the less significant disadvantage in that allowances available to their American competitors are not allowed to companies based in this country.
Indeed, the American practice has the advantage of recognising the reality of the situation, namely, that groups of companies operating in a large number of different countries are operating as one worldwide organisation. They do not look at a series of separate individual businesses, each in a separate compartment. They look at their worldwide operations as a whole. It is according to that test that they should be judged and according to that test that they should be taxed.
The Amendment would go some way to achieving that result. I am extremely disappointed that the Chief Secretary has resisted it in such uncompromising terms. I believe that my hon. Friend has a good case, and my advice to him is that, when the Question is put, he should leave the Amendment to be negatived and not seek to withdraw it. I believe that he has a good case.