The clause contains a provision to counter an avoidance scheme that abuses the double taxation relief rules. The provision will not bring in substantive additional corporation tax, but it is estimated that it will prevent losses to the Exchequer that would be up to £100 million a year if the abuse continued unchecked. The double taxation relief rules are designed to give relief in the UK for foreign tax paid on the same income or profits charged to UK tax. If any of that foreign tax is reduced, UK tax should be reduced by the same amount.
HMRC has become aware that in some circumstances it is possible for a UK parent company to obtain a payment by reference to the foreign tax paid by a subsidiary company. The payment is made when the subsidiary pays a dividend, so the parent company receives the profits with little or no foreign tax suffered. That has been exploited by groups in an avoidance scheme that seeks to obtain relief for foreign tax where the group has not borne the economic cost of that tax.
It is a long-standing principle that if foreign tax is repaid, credit for foreign tax should be reduced by the amount of the repayment. The clause ensures that the same reduction in credit occurs if the payment, by reference to the foreign tax, is made not only to the company that originally paid the tax, but to a different person connected with that company. Typically, that will be the parent company. However, it has been brought to our attention following the publication of the Bill that the clause may affect the operation of commercial cross-border loan arrangements arising from the London loan market.
The Government amendments would have provided that the clause applied only to payments made under the laws of a territory outside the UK. Opposition amendment 217 addresses the same point differently and perfectly appropriately, although not, technically, in the correct way. The Government amendments reflected agreement that HMRC reached with industry legal advisers and had the advantage of following existing legal precedent that applies for the purposes of controlled foreign company legislation. The Government amendments would have covered the overwhelming majority of cases where refund of foreign tax might arise from commercial contracts. However, since formulating the Government amendments, we have received further representationsI am grateful to the Chartered Institute of Taxation for thosewhich show that there may remain situations where the amendments do not go far enough to ensure that the clause does not hit any unintended targets. Although these are unusual circumstances, it is right that we should take account of them.
The Opposition amendment would restrict the operation of the clause across a wider range of circumstances than the Government amendments because it limits the clause to those cases where the repayment is made by the foreign tax authority only. By contrast, the Government amendments would have left the clause in operation whenever the repayment arose out of the application of foreign law. In view of the further representations that we have received, I accept that the Government amendments would not have gone far enough in restricting the scope of the clause. Therefore, I have not moved the Government amendments. I will reconsider the position and return to the matter with further Government amendments on Report.
The Opposition amendment is broader in scope but has some technical difficulties. The reference to a taxing authority would be novel in tax law and its effect is not altogether clear. Although I am grateful to hon. Members for tabling it, there needs to be further reflection in order to get this right on Report.
I reiterate that we broadly support clause 59. As the Minister said, it targets a specific avoidance scheme. In essence, as I understand it, this relates to where the UK gives credit for tax paid elsewhere but where separate relief has already been granted to a connected party. The Minister used the term group and I would be interested to hear from him what sort of groups he means. Would they typically be financial institutions, as with the last clause, or would another type of corporate structure be involved in this sort of scheme?
Currently, a UK company which has claimed double tax relief in respect of foreign tax paid must notify HMRC and amend its claim if there is a subsequent change in the amount of foreign tax, for example, as a result of a repayment. However, if the tax is repaid to a person other than the claimant, it is arguable that there is no obligation to amend the double tax relief claim. This can arise, for example, because in some foreign territories when a resident company pays a dividend, a refund of tax paid by that company is made to the recipient of the dividend rather than to the company. Clause 59 ensures that a double tax relief claim will have to be withdrawn or amended where there is a repayment of a foreign tax to a person other than the company that made the claimthat is, to a connected party, as the Minister described another party within that same group. Relief will then be given only for the net amount of foreign tax paid, less the payment to the connected person. As we know, the clause is effective for payments made on or after Budget day, 22 April 2009. We very much agree with that point.
I am going to explain our amendment and consider where we would go from here in relation to the three amendments. In our viewand I think the Minister is saying the same thingthe clause does not specify that the payment must come from a taxation authority. There are situations between private companies where one company may pay another in respect of foreign tax. For example, on the simple sale of a company, the selling company will normally indemnify the purchaser against any outstanding tax liabilities, which would include foreign tax. Under the current drafting of subsection (2) the proposed new section 804G of the Income and Corporation Taxes Act 1988the person making the payment is not specified. Therefore, in our view it has great potential to catch unintended matters that are entirely commercial and at which the legislation is not aimed.
The Minister said that our amendment does not deal with these matters in technically the same way. I am slightly at a loss. I think he is probably right and I am going to take his word for it in this circumstance. I am slightly disturbed that we are now going to have to come back to this on Report. We have had two Government amendments, two attempts to get this right, since the Finance Bill was published. I must minute our disappointment that we are going to have to bring back this measure on Report, even after todays reasonably full debate. However, we will not oppose either the clause or the Governments intention to return to it.