I welcome you to the chair for our deliberations this afternoon, Sir John. It is a pleasure to see you, and I will be extremely careful, as always, because you will be paying close attention to the many areas of discussion on which you are very knowledgeable.
Before we broke from this morning's sitting, we were considering clause 30 on transfer pricing. I have dealt with the specifics in the questions from the hon. Member for Hertford and Stortford (Mr. Prisk), and in my closing remarks I wish to clarify the purpose of the clause.
This morning we discussed issues around transfer pricing. The rules are vital to ensure that businesses, especially multinationals, are taxed fairly in respect of their activities in the United Kingdom. Until now, taxes have applied only to cross-border transactions. Doubt had been thrown on their effectiveness because of decisions made in the European Court of Justice on the tax rules of other countries. Clauses 30 to 37 address the uncertainties that business has identified.
I also made it clear this morning that, although the Government are responding to those uncertainties, we will defend any challenges to existing UK legislation. I am perfectly at ease with the proposal, and I explained to the Committee that we are content. My officials advise me that the proposals cause no further uncertainty; rather they provide the structure that the companies concerned wish to see.
I, too, welcome you, Sir John. The Paymaster General is, as usual, being patient. She will recall that this morning I alluded to tax harmonisation, to which I am utterly opposed, in the points that I made about what the Spanish Government are doing about transfer pricing and thin capitalisation.
I have received a brief from the Institute of Directors, which I am sure the Paymaster General has seen. The institute makes an excellent point, which is very relevant to what she has just said about the encroachment on our independent, sovereign power to tax. It reluctantly concludes that
''the Government had little choice but to pass this legislation, although we continue to call for an amendment to the European Treaties''—
it splits an infinitive but I will not—explicitly to allow
''member states to ''discriminate'' in tax matters.''
I would very much favour that, and I look forward to hearing the right hon. Lady's views on such an amendment to the treaty.
Transfer pricing regulations and tax guidance are not the subject of amendments to the treaty. As I explained this morning, the UK has operated those provisions for some time, following the principles laid down and recommended by the Organisation for Economic Co-operation and Development. The Inland Revenue operates them with some aplomb. Transfer pricing regulations and rules are about insuring and protecting the corporate tax base of this country. As I said a number of times this morning, the Government and the Inland Revenue considered that our legislation was compatible, but we also recognised that it was essential, because of the response of business and its view that there was uncertainty, that we put these matters beyond doubt. That is what clauses 30 to 37 do.
The Government have repeatedly made clear their views on tax harmonisation. On behalf of the Government, I have in various Committees of this House and in different debates made it clear that they do not subscribe to tax harmonisation and that they continue to argue in every forum for the right of member states to determine their own tax rates.
As tempted as I am to probe whether the hon. Gentleman may be more at ease on the Government Benches with regard to policies on tax and the European Union, I fear that you will say that I am going beyond the scope of the clause, Sir John. Perhaps I should stick to clause 30, unless the hon. Gentleman wishes to stand up and declare himself so in support of this Government that we can welcome him to our Benches.
We come back to seduction. I am being led astray by the hon. Gentleman again.
Regrettably, a growing body of EU legal cases continues to encroach on our ability to set our own taxes and to have our own UK competitive tax system. That is especially so in the corporate sector. Will the Paymaster General and her erudite and eminent colleagues at the Treasury consider an amendment to the EU treaties enabling—
Order. The hon. Gentleman is straying way beyond the scope of the clause. However fascinating the Government's opinion on this subject may be, the Paymaster General has already made their view clear and I would be grateful if she was not tempted down that route again when responding to the intervention.
In that case, I will return to the discussion on the impact of clause 30. The hon. Member for Torridge and West Devon (Mr. Burnett) touched on the following point this morning. Clauses 30 to 37 deal with each element involved. As a combination, the clauses are broadly revenue-neutral. I am responding to points that hon. Members have made, but it is probably more relevant to discuss this matter as we go through the clauses.
However, the Government recognise that the extension of the transfer pricing requirements has the potential to increase administrative requirements on companies, so following discussions with business the clauses implement a package of measures to mitigate the effect of the change. Examples include the exemption for small and medium-sized companies under clause 31, which we will be able to probe later, and considerations involving dormant companies for the 1 April 2004 period.
The hon. Member for Hertford and Stortford touched on administrative pressure. Clause 33 relates to the relaxation of penalties for record keeping for a transitional period. That touches on the question that the hon. Gentleman raised, namely why we do not delay. I have explained why delay is not possible, given the uncertainty. Therefore, in consultation with business, the Government sought other arrangements to provide that transition period. The hon. Gentleman also touched on the question of loans. As he knows, we deal with the question of securitisation in later clauses, so he will forgive me if I do not deal with those specific points now.
Clause 30 extends the scope of transfer pricing requirements to include United Kingdom transactions, in order to address the uncertainty that has arisen in the existing legislation. The clause also extends the scope of the existing rules for compensating adjustments, which enables double taxation to be addressed, so that an increase in the taxable profits of one company can be reflected in a compensatory adjustment of taxable profits in another. The clause introduces a new system of balancing payments. Where a transfer pricing adjustment has been made for tax purposes, a group can make a payment with no further tax consequences, either for the payer or the recipient, to keep its cash position in line with its tax position. Finally, clause 30 gives effect to schedule 5, which makes the detailed consequential amendments to the existing legislation. So, clause 30 deals with the scope of the existing rules, their extension to UK transactions, compensatory adjustments and the introduction of balancing payments.
As I said, the uncertainty must be addressed because of its consequences for business at present. I touched on that this morning with regard to keeping open accounts. That is why, in giving business time to adapt fully to the system, we are, first, relaxing penalties for a transition period of two years, and secondly taking steps to minimise the effect on business. The hon. Gentleman touched on the question of investment. It is important to remember that there will be no effect on investment because the question that transfer pricing deals with is which
company a profit arises in, not what the overall level of taxable profit is.
The hon. Gentleman also touched on the question of royalties in a group. Groups of companies are used to charging royalties on cross-border transactions. It is true that those will, in some cases, become a requirement under UK law. That is an example of what transfer pricing means. We are acting to restore certainty about the effectiveness of the rules, which are essential to defend the corporate tax base of the UK, and we have taken important steps to mitigate the increased requirement on some companies. As I said, we will come to various other requirements in subsequent clauses and, in particular, to the exemption that will cover 95 per cent. of small and medium-sized companies.
The hon. Gentleman said that we were responding to corporate tax reform on a piecemeal basis. He will not be surprised to hear that I do not agree with that suggestion. We recognise the need to have a wide-ranging dialogue with business concerning all the implications of the corporate tax system, including recent developments in European law, and, in particular, considering our corporate tax system and whether it has responded, and is relevant, to the changing needs of companies, the economy and the world economy. That commitment to a dialogue was clearly set out in both the pre-Budget report and the Budget. The issue for the Government, based on what companies were saying to us, was that ongoing dialogue, which covers a wide range of areas, does not remove the urgent need for action on transfer pricing.
My concern is that there should be a strategic view underscoring the provisions. Without wishing to stretch your patience too far, Sir John, we were hoping for a glimpse of that strategy. We would be happy for the Government to adopt a broad view on where the lines can be drawn vis-à-vis the scope and remit of the ECJ. I understand that that would go too far beyond the scope of the debate, but it would be helpful if the Minister told us that such a strategy is being considered, and whether there will be an opportunity in the not-too-distant future for the House to consider that strategy.
With respect, the corporate tax review and the dialogue that has been going on for nearly two years address a more fundamental question: the appropriateness of, and the response to, a whole range of measures in the corporate tax system ranging from capital allowances to schedules. The review raises the question of how to assist investment, and the consultation on that was published at the time of the pre-Budget report on assisting companies with equity finance.
There is a much more fundamental debate concerning how we ensure that our corporate tax system is responsive and secures revenue, but is also broad-based, intervenes at the correct time where there is market failure and ensures that companies are able
to develop and grow while meeting the challenges of the UK and global economy.
On the question of ECJ rulings, the hon. Gentleman will have to accept that it would be foolish of the Government to try to assume what the ECJ may say in future about cases which may or may not come before it. The Government's purpose is to develop a robust, active corporate tax system which is on all fours with the legal requirements, and that is precisely what we are doing. The hon. Gentleman's obsession with the ECJ blurs a more strategic focus on what the corporate tax system should look like.
The discussion with business has been very productive and is continuing, but it has far-reaching consequences for changes in the tax system. The hon. Gentleman should remember the changes to intellectual property rights, research and development tax credits, and capital gains tax or the improvements to the taper, where we moved away from indexation. There is a question of the speed at which agreement is achieved by business and Government as we take on these changes.
Mr. Prisk rose—
Order. With great respect to the hon. Gentleman and the right hon. Lady, I think that she has been tempted down this road quite far enough. It is well removed from the scope of the clause. It is perhaps an important matter for another debate at another time, perhaps in a different place, but not in this Committee.
It is a requirement of any Government to ensure that uncertainties, real or otherwise, that business identifies as affecting its behaviour are dealt with. The clauses, of which clause 30 is the first, will remove all doubt identified by business, regardless of whether the Government believed that there should have been any uncertainty.
I hope that as the debate progresses the Committee will accept not only that the Government work closely with business in discussing the issues—and have responded to its requests in several places in the clauses—but that we made it very clear that there were no other suggestions or possibilities for dealing with the matter, and no other suggestions were advanced. I commend clause 30 to the Committee.
Question put and agreed to.
Clause 30 ordered to stand part of the Bill.
Schedule 5 agreed to.