I beg to move amendment 155, in schedule 16, page 182, line 32, at end insert and
( ) in this Act, section 57(6)..
I am, again, grateful for your clarification.
Schedule 16 makes consequential changes arising from what we have just agreed to the controlled foreign company rules designed to stop UK groups from artificially diverting profits to low-tax territories in order to avoid paying UK tax on those profits. The controlled foreign company rules counter this by charging UK tax on the diverted profits. The controlled foreign company legislation is subject to a series of exemptions, two of which are the subject of this schedule. Those are, first, the acceptable distribution policy and, secondly, exemptions for holding companies. Following the introduction of an exemption regime for foreign dividends, these exemptions are no longer appropriate and are removed.
Amendment 155 is tabled to repeal clause 57(6) of this Bill with effect for accounting periods of controlled foreign companies beginning on or after 1 July 2009. This clause contains double taxation provisions that come into effect for dividends paid on or after 1 April 2008, but subsection (6) will no longer be needed from 1 July 2009 as the ADP exemption is repealed on that day as a consequence of the introduction of dividend exemption.
Amendment 156 is tabled to remove a mismatch between the controlled foreign company and double taxation rules to ensure that there is consistent treatment of profits arising before and after commencement. Although scope for abuse does exist, this mismatch is more likely to produce the wrong result and therefore needs to be corrected. It reflects an omission that unfortunately did not come to light during earlier consultation. On that basis, I hope that the Committee will accept the amendments.
I do not have a problem with the amendments, but I want to probe the Minister on one point. Controlled foreign companies, being controlled foreign holding companies, are obviously a good thing and international commerce creates sundry types and forms, and various structures will exist internationally, and that is all to the good. There is a natural moral distinction between legitimate companies as part of ordinary business development and illegitimate companies that are set up expressly for the purpose of tax avoidance. There seems to be a parallel distinction in schedule 16 between local holding companies, which enjoy exemptions, and non-local holding companies, which have their exemptions withdrawnas is also the case with superior holding companies. I support that; I support all the changes in corporate taxation that have been identified by the Minister. The acid test, and it seems a fair test, is always identifying the ultimate corporate parent or beneficiary.
I admit that it is slightly tangential, but I would like to ask the Financial Secretary about the Tesco case. I am not familiar with its exact techniques, but the Minister will be aware that it set up a controlled foreign company in Liechtenstein. This was not to avoid corporation tax, which it was accused of by The Guardian and which it exonerateditself from, but in order to avoid stamp duty. Do the provisions in schedule 16 have any implications for such tax loopholes?
Mr. Atkinson, I welcome you to our deliberations this afternoon. I shall respond to the points that the hon. Gentleman made in my clause stand part speech. I do not think that the question arises specifically from the amendments.
I am happy to speak more generally about the schedule, if that would be helpful to the Committee, having moved the Government amendments as well.
Schedule 16 amends the controlled foreign company rules. The rules work by apportioning the profits of the foreign subsidiary back to the UK, therefore subjecting those profits to a UK tax charge. The impact of the present legislation is limited by a series of exemptions, which are designed to exclude from charge those foreign subsidiaries that can reasonably be assumed to exist for reasons other than to divert profits artificially from the UK. Two of those exemptions are subject to the provisions of the clause and schedule; they are the acceptable distribution policythe ADP exemptionand holding company exemptions. Following the introduction of an exemption regime for foreign dividends, those two exemptions from the rules are no longer appropriate and are therefore removed.
The acceptable distribution policy exemption applies when 90 per cent. or more of the foreign subsidiarys profits are paid back to the UK as dividends. The premise underlying the ADP exemption was that, as dividends were taxable in the UK, there was no significant UK tax avoidance. However, introducing an exemption regime means that most dividend payments from foreign subsidiaries will no longer be taxable, so the exemption becomes redundant. The ADP rules are therefore repealed on 1 July 2009, the same day that the dividend exemption is to be introduced. Schedule 16 makes provisions for accounting periods straddling that date to be split into two. That will ensure that profits accruing prior to the introduction of the dividend exemption can still qualify for the ADP exemption.
I imagine that those two brackets refer to a continuation of the numbering system, but I may come back to that point.
I was explaining the ADP exemption. I shall now move on to the holding company exemption. The other exemption that we are reforming is that for foreign subsidiaries that qualify as holding companies. Generally, the exemptions allow companies that receive mainly the specified types of income, and little other income, to be exempt from the CFC rules. There are different categories of holding companies, depending on the specified types of income. Schedule 16 removes the superior and non-local holding company exemptions, as most foreign dividends will now be exempt. Retaining those exemptions in such circumstances represents an unacceptable risk to the Exchequer. Groups could abuse the exemptions by recycling dividends within the group, resulting in increased amounts of profit and tax on those profits being diverted from the UK.
To allow companies time to adapt to the rules, we are introducing a two-year transitional period. During that time, the exemptions will be available only in a restricted form to mitigate Exchequer risk. The transition period will also overlap with the longer term CFC review, allowing business to consider the outcome of this change alongside the removal of the holding company exemptions.
The Minister referred to a transitional period, but one of the issues that I see being flagged up is that some exemptions will continue through the transitional period so long as the company continues to be held within the group and there is no change of ownership. I can understand the Government wishing to prevent a change of ownership arising as part of a tax planning device, but in some cases the change of control will be for legitimate commercial reasons. Why, in such cases, should legitimate commercial transactions lose the benefit of the transitional relief?
The hon. Gentleman is right that the exemption will be available only in the restricted form to mitigate Exchequer risk during that two-year period. If I may, I shall reflect on the hon. Gentlemans precise question, and come back to him before finishing.
The local holding companies exemption will be retained, as it is typically required for commercial reasons and retaining the rules does not pose a significant risk to the Exchequer.
I think that I am now in a position to answer the question that the hon. Member for Fareham asked about whether condition A is too stringent, if I understood it correctly. The condition means that groups cannot sell companies defined as qualifying holding companies to another group and take advantage of the transitional rules. That prevents groups from buying qualifying holding companies to shelter income from the UK. The definition of control allows groups to move those companies intra-group so that they can restructure if they wish.
The Minister gets the point exactly. I understand that the restriction is to prevent that sort of tax structure to shelter profits, but there may be a sensible commercial reason why a group decides to sell a holding company and the activities that sit beneath it. It may decide that it wants to sell its tobacco interests in Spain, for example, and sell that group of companies to another business. The acquirer will lose the exemption where there is a legitimate commercial reason for the sale. It is not a transaction to avoid or reduce the tax bill; it is a legitimate commercial transaction with solid commercial substance to it, but the benefit of the transitional relief is lost as a consequence of the sale.
It may be that the most helpful thing I can do is reflect on the hon. Gentlemans point and write to him setting out my conclusions.
Two other points were made in the debate. The hon. Member for Southport asked about implications for stamp duty. It is difficult for me to comment on a particular company. Although I was interested by The Guardianseries, I do not recall the case that he referred to. The purpose of the controlled foreign company rules is to protect against corporate tax avoidance of the kind that the series discussed. The changes have no implications for stamp duty, as far as I am aware. That may answer the hon. Gentlemans question, but he will appreciate that I cannot comment on the particular case.
It is slightly anomalous to create a regime that prevents people from setting up holding companies to avoid corporation tax and leaves open loopholes through which they can avoid other sorts of taxation by similar methods.
I do not think that we are opening any loopholes. We are not making any changes to stamp duty.
Finally, in response to the hon. Member for Peterborough, as I suggested, the brackets are there to continue the numbering on from whatever the previous numbering was.
Reduction in chargeable profits for certain financing income
21 ICTA is amended as follows.
22 In the following provisions, after 751A insert or 751AA
(a) section 747(3A) and (5A) (imputation of chargeable profits and creditable tax of controlled foreign companies),
(b) section 749(10) (residence),
(c) section 749A(9) (elections and designations under section 749: supplementary provisions), and
(d) section 750(3)(ab) (territories with a lower level of taxation).
23 After section 751A (reduction in chargeable profits for certain activities of EEA business establishments) insert
751AA Reduction in chargeable profits for certain financing income
(1) This section applies if
(a) an apportionment under section 747(3) falls to be made as regards an accounting period (the relevant accounting period) of a controlled foreign company,
(b) the chargeable profits of the controlled foreign company for the relevant accounting period would, apart from this section, include an amount of income in respect of a payment made by another company (the payer),
(c) the amount that the payer brings into account for the purposes of corporation tax in respect of the payment is reduced (in part or in full) by virtue of Part 3 of Schedule 15 to FA 2009 (tax treatment of financing costs and income), and
(d) a company resident in the United Kingdom (the UK resident company) has a relevant interest in the controlled foreign company in the relevant accounting period.
(2) The UK resident company may make an application to the Commissioners for Her Majestys Revenue and Customs for the chargeable profits of the controlled foreign company for the relevant accounting period (the chargeable profits) to be reduced by an amount (the specified amount) specified in the application (including to nil).
(3) If the Commissioners grant the application
(a) the chargeable profits are treated as reduced by the specified amount, and
(b) the controlled foreign companys creditable tax (if any) for that period is treated as reduced by so much of that tax as, on a just and reasonable basis, relates to the reduction in the chargeable profits,
for the purpose of applying section 747(3) to (5) for determining the sum (if any) chargeable on the UK resident company under section 747(4)(a) (but for no other purpose).
(4) The Commissioners may grant the application only if they are satisfied that the specified amount does not exceed the relevant amount.
(5) In subsection (4) the relevant amount means the amount (if any) by which it is just and reasonable that the chargeable profits should be treated as reduced, having regard to the effect of Parts 3 and 4 of Schedule 15 to FA 2009 on amounts brought into account for the purposes of corporation tax by the payer, or any other company.
24 (1) Section 751B (supplementary) is amended as follows.
(2) In the heading, for Section 751A substitute Sections 751A and 751AA.
(3) In subsections (1), (2), (3) (in each place) and (5), after 751A insert or 751AA.
(4) In subsection (8)
(a) after the relevant amount insert
(a) in the case of an appeal in respect of the refusal of an application under section 751A,, and
(b) after mentioned in that subsection insert , and
(b) in the case of an appeal in respect of the refusal of an application under section 751AA, has the meaning given by subsection (5) of that section.
(5) In subsection (10)
(a) after 751A insert or 751AA, and
(b) after 751A(1) insert or 751AA(1).
25 (1) The amendments made by this Part have effect in relation to accounting periods of controlled foreign companies ending on or after 1 January 2010.
(2) For this purpose accounting period and controlled foreign company have the same meaning as they have for the purposes of Chapter 4 of Part 17 of ICTA..(Mr. Timms.)
The Minister sat down before I could intervene on him, but I had a question about the changes in the schedule. I am aware of the extent to which the CFC legislation is being revised, and that a group is advising HMRC and the Treasury on this matter. I seek some guidance from him, however. It is envisaged that the measures will not take effect for some time, and further changes to CFC legislation are likely to be made as we go along. Is this not premature and destabilising with regards to the long-term view of how the CFC legislation should emerge?
I think that I can reassure the hon. Gentleman. He is right that we are introducing a two-year transitional period, which I think is right to enable companies to make adjustments. In the early part of the period, we will review the CFC rules, but will do so in the light of the legislation before us. He is right to say that a number of things are going on here with the CFC rules, but we will need to ensure that they are properly co-ordinated and that we do not run into problems of the kind that he perfectly reasonably warns us about.