Clause 47 - Controlled foreign companies

Finance (No. 3) Bill – in a Public Bill Committee at 10:30 am on 7th June 2011.

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Photo of David Hanson David Hanson Shadow Minister (Treasury) 10:30 am, 7th June 2011

I beg to move amendment 100, in clause 47, page 28, line 11, at end add—

‘(2) Notwithstanding the provisions of paragraph 14 of Schedule 12, the Schedule will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.’.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss amendment 101, page 213, line 31, in schedule 13, leave out

‘on the day on which this Act is passed’ and insert

‘when a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.’.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Welcome back to the Chair, Mr Hood. Looking around the room, it seems like only yesterday, but we have been away for a week. I am sure that everyone has had a marvellous time. I place on record my best wishes to the hon. Member for Elmet and Rothwell, who—unlike the rest of us, who have obviously been sweating hard over the clauses before us—used the week away productively by getting married. I wish him well, certainly on behalf of the Opposition.

We tabled the amendment because, whatever the issues around the changes to controlled foreign companies, it is important to make a full assessment of the impact of developing tax issues in developing countries before we approve clauses 47 and 48 and the appropriate schedules. Clause 47 deals with the way profits made by foreign companies and multinationals are treated in the UK for tax purposes. It deals with the treatment of profits made by subsidiary companies, which are companies within a wider group of companies that make up a multinational structure. Those are known as controlled foreign companies.

In the past, multinationals based in the UK have had to pay corporation tax not only on profits that they have made in the UK, but on profits they have made through subsidiaries and branches abroad. The system  gave credit for any overseas tax in working out the corporation tax liability, but taxation occurred either when the profits were sent back to the UK or, where the company was in a low-tax territory, by deeming the profits to have arisen in the UK. The CFC rules have stopped companies moving their profits out of the UK to avoid tax, but they have also provided a disincentive to base in the UK. Multinationals have threatened to move their headquarters abroad and some have done so. I will touch on that again shortly.

In government, the Labour party was committed to moving towards a more territorial regime—a regime where profits made in the UK are taxed in the UK but profits made in other countries are not. We consulted extensively on how the rules could be changed to provide more certainty for business to ensure that the UK remained an attractive place for multinational companies to be based, but also to ensure that the UK tax base was not eroded by profits being moved offshore. The general direction of policy was set in this area when we were in government, and the Minister can be assured that we generally support the direction of travel, but we have some concerns, which is why I tabled the amendments.

I am concerned that the Government have not fully thought through the detailed consequences of their changes, particularly the impacts on developing countries. It is not just for me to say that: sometimes I reflect my opinion and sometimes I reflect the opinion of organisations outside the House, which I share and which I feel need to be developed. The Minister will know that ActionAid—a British charity founded in 1972 and working in 50 countries —has raised similar concerns to those in amendments 100 and 101, and it is important that he addresses them.

ActionAid has a range of issues it wishes to see developed further, and the Minister will be aware of the detail. It calls on the Government to do what we have proposed in the amendment: consult developing countries on the proposed changes and consider the impact of the reforms on them—for example, by looking with other Departments at capacity building on corporate taxation, and further extending activity begun by the Labour Government on support in the G20 for country-by-country financial reporting. We could then see where multinational companies were paying tax, and how much. If there were any tax avoidance, tax efficiency or, as some would say, tax dodging—however we want to phrase it—it would be highlighted so that multinational companies were accountable for the taxation that they need to pay as their contribution to society.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

I thank my right hon. Friend for spelling out concerns about the proposals. ActionAid is an organisation with a good pedigree and it needs to be taken seriously when it puts these considered and careful thoughts to the Committee. The Government should take it seriously and come back on the points raised.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

ActionAid is a worthy organisation willing to look at the issues in detail and take positive action itself. It moved its headquarters from the UK to South Africa in 2003 to help to support developing countries. It is trying to shine a light on concerns over ensuring that multinational companies pay a fair share of tax in the appropriate country, and do not use the ability to  move business around the world to avoid taxation—a practice particularly disadvantageous to developing countries.

A particular problem is that CFC rules act as a brake on tax avoidance by UK companies, no matter who would lose out from the avoidance. The proposed reforms will release the brake where the tax being avoided is that of a country other than the UK. ActionAid has raised issues about a number of countries and, as the Minister will be aware, recently produced a document on the company SABMiller, which shifted profits out of developing countries through royalty payments to the Netherlands, management fees to Switzerland, procurement via Mauritius and interest payments to Mauritius, so easing its tax burden to the disadvantage of the countries where it was based. It is feared that that will become easier and more common.

The key point is that, although richer countries such as the UK might have the legislative and administrative capacity to cope, the reforms could lead to an intensification of tax avoidance by UK companies in developing countries. ActionAid has estimated that as much as £4 billion in tax in developing countries could be avoided as a result of the proposals before the Committee. I do not know whether that figure is correct; I do know that the Treasury has looked at it, because it received freedom of information requests on the issue. We need an assessment from the Minister of whether that figure is accurate.

I have some FOI responses to ActionAid’s £4 billion estimate from officials at the Treasury and the Department for International Development, who looked at the issue in detail. One reason why I tabled the amendment is that those responses show that the Government have not really considered the impact of these measures on developing countries or on the tax take in those countries. In a trail of e-mails that I received recently under FOI, on 16 March an official in Her Majesty’s Treasury, whose name has helpfully been blanked out—they may even be in the room as we speak—told an official in DFID:

The AA response to the consultation is on the proposals for taxation of foreign branches and CFC interims. The calculation of cost to developing countries is very crude and is simply based on one fifth of profits being moved out of entities in developing countries. I would assume this proxy is based on the impacts of both these reforms due to the scope of their response… we strongly disagree with these numbers but”— this is very illuminating—

“have not done any work on this.”

ActionAid says that the proposal will cost developing countries about £4 billion, and the Treasury says that it believes that that figure is very crude. If, as the official states in the e-mail, the Treasury has not done any work on this, will the Minister tell me on what basis he disagrees with the £4 billion figure from ActionAid? That communication proves that the Treasury has not done any work on the matter, so how can the Minister say that the £4 billion figure is wrong?

Later in the e-mail chain, an un-named HMT official states in an e-mail to other un-named officials in HMT and in DFID that

“we think a big focus will be why is there this give away to big business in a time of spending cuts”.

I could not agree more. Does the Minister believe that there is a give-away to business in this time of spending  cuts, and how big is it? How much will the proposals save big business and how much taxation will big business avoid as a result of them?

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

Is not that exactly the point that ActionAid is making? Its concern is precisely that the proposals may turn out to be a give-away to big business and a loss to the people whom it should properly reach.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

That is ActionAid’s concern; it believes that developing countries may lose £4 billion in taxation as a result of the proposal. If an un-named Treasury official is saying to an un-named DFID official that

“we think a big focus will be why is there this give away to big business in a time of spending cuts”,

the Minister needs to tell me exactly how much he assesses that to be, and whether he shares ActionAid’s commitment to £4 billion. Again, although we are talking about rubbish in e-mails, those e-mails also state that the Treasury has not done any work on the figures and factual information.

An e-mail from an un-named official in DFID to un-named officials in HMT, on behalf of the Ministers in the Department, is potentially even more illuminating:

“Basically, spads want to know whether the Budget is when the stuff is going to hit the fan so that they can start thinking about a plan.”

I would like to know whether the stuff has actually hit the fan and whether they have a plan, because that is what SpAds—special advisers—in DFID are asking. Putting that together with, “We have not done any work on this,” and, “We think it is a big give-away to big business at a time of spending cuts,” and considering that ActionAid anticipates £4 billion being lost to developing countries as a result of the proposals, the amendment is justified.

Photo of Alison McGovern Alison McGovern Labour, Wirral South 10:45 am, 7th June 2011

Is my right hon. Friend aware that most UK aid spent by DFID assists poor countries in tax collection, because that is the best way for such countries to develop themselves out of poverty? There is a clear conflict between two parts of Government: one side is trying to help developing countries with tax collection while another appears to be doing something else.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

It is important that the Minister tell the Committee what discussions he has had with DFID on those very points. As my hon. Friend says, it is extremely important for developing countries to have a strong, effective tax-raising base with a developed civil service developing and undertaking the type of tax work that we would expect in a developed country such as the United Kingdom. As she says, handouts from western countries are one thing, but development of a strong tax base and delivery of taxation measures are a quite different approach.

It is important that the Minister give some indication of the discussions he has had with DFID over and above the helpful FOIs that I have recently received. According to those FOIs, DFID is worried about when the stuff is going to hit the fan, so that it can start thinking about a plan. That is not saying when the stuff  is going to hit the fan; it is saying, “So we can start thinking about a plan.” What is the plan? Is the plan to say that this does not mean anything? Is the plan to spin out the discussion, or is it to look at whether the £4 billion is a genuine figure? The Minister has some answering to do, including on behalf of his colleagues at DFID.

It is important that we look at the issue, because we expected, and the FOI requests indicate, that a new CFC consultation document would be published in May 2011. We have been away, but it is now June 2011. I looked at the Treasury website this morning and no further consultation document has been forthcoming on the next round of CFC consultations. The consultation document is TBC—to be confirmed—for June. It is important that the Minister is open with the Committee about the next stage of the consideration of CFCs. When is the next consultation likely to be and how does it fit into the regime that we have before us? The FOI e-mails before me discuss how the two link together and what action the Government need to take.

The amendment makes a simple request:

“Notwithstanding the provisions of paragraph 14 of Schedule 12, the Schedule will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.”

Accordingly, we should consult developing countries more widely. ActionAid itself says:

“The Treasury has not assessed the impact its proposals are likely to have on developing countries.”

ActionAid also says that the Treasury has not consulted anybody except business. Well, business is hardly likely to give a full view of the picture of tax avoidance. The Government need to publish an assessment of the impact that the proposed changes will have on developing countries, consult those developing countries and address the points raised by my hon. Friend the Member for Wirral South on how we look at the issues in the round to develop a stronger base for taxation in those developing countries.

ActionAid looked at a simple list of 10 publicly listed companies whose segment reporting allows for analysis of their financial results in developing countries. The sample showed pre-tax profits in such countries of £16 billion in 2009, which is of general interest to the Committee, and I want to look further at that issue.

The combined market capitalisation of the sample of 10 companies was £345 billion, which led to an estimate of UK listed companies’ profits in developing countries of £83 billion. Applying an average global corporation tax rate of 25%, the nominal tax bill for UK companies in 2009 was £21 billion. If developing countries were to lose one fifth of that amount to tax avoidance following the CFC rules, the loss would be the said £4 billion. ActionAid looked at African Barrick Gold, Anglo American, Barclays, G4S, Reckitt Benckiser, SABMiller, Standard Chartered, Unilever, Vodafone, and Xstrata, and that conclusion of £4 billion was based on those 10 companies.

It is important that the Minister examine that issue, and if he does not respond to me, he should respond to the concerns that have genuinely been expressed by a third-party non-governmental organisation about the  impact of these measures. The Government should monitor the consequences carefully, because there are concerns that the costs could be higher than expected. Some tax experts believe that the Government are underestimating the long-term costs of the changes, and that the costings do not take sufficient account of the fact that companies will restructure to take advantage of the new regime.

The Government announced that there will be further significant changes to the CFC rules in the 2012 Finance Bill, which could cost the Exchequer £210 million, £540 million, £770 million and £840 million over the next four years, from 2012-13. Those are significant sums at a time when there are, as we know, cuts across the board elsewhere. That again returns us to a point that has been made not by me, but by officials in the Minister’s own Department, when they said that

“we think a big focus will be why is there this big give away to big business in a time of spending cuts”

—perhaps to the extent of £840 million a year by 2015-16.

The Minister needs to tell the Committee what his costings are, and not only for this year, because we need to know about the future CFC rules. He has not yet had the courtesy to bring those rules forward for public consultation, despite the fact that, before the clause came before the Committee, he said that we would have the consultation document in May. I admit that our discussions are going slower than they might have done, but that is no reason for him not to have produced the consultation document. Even in his March documents, he said that it would be produced in May. It is now June, so it will happen after we have considered these measures in the Committee. This is not a simple one-off package; it is part of a wider series of Government measures. We need to look at those, and the Minister needs to enable some discussion and consultation about where we are with regard to current and future plans.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

My right hon. Friend’s point is well made. At a time of austerity, when people have to tighten their belts for all sorts of reasons and things are not happening, to go ahead with what is potentially a give-away, and without assessing that beforehand, would be most unwise.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend for his intervention.

On 9 November 2009, the Treasury had a Treasury and HMRC stakeholder event, where a helpful slide presentation was given on the policy principles behind both these clauses and future proposals. On CFC reform, the following was indicated:

“There is a continuing need for CFC rules to protect the UK tax base from erosion. However, it is essential that the rules keep pace with the changing economy… the Government considers that there is scope for modernising the CFC rules in a way that will enhance UK competitiveness while providing adequate protection of the UK tax base.”

The slide continued:

“No Ministerial decisions have been made yet on details of new regime. Final decisions on the implementation of any revised CFC rules will need to take into account the economic position and wider Government finances”.

We will consider clauses 47 and 48 this morning, and we had indications from the Minister that a further consultation document could be published before we  considered them, but that has not yet been produced by the Government in respect of 2012. We still have no detail on how the situation will look in the longer term. It is important and integral that the Government commit to improving transparency, particularly in the taxation of branches, so that multinationals can be held to account. The changes have the potential—I say potential, because the Minister can defend his position if it not the case—to reduce transparency, but there is still much detail to be pinned down, particularly with intellectual property. The consultation document, which was expected in May, has not been produced. I would like to know a definitive date for when the next consultation document on CFC rules will be produced, because that is integral. That document should certainly be produced before we conclude consideration of the Bill on the Floor of the House on Report, but I would welcome some confirmation.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I would also welcome from Ministers not only an indication of when they intend to produce a consultation document, but a list of who they would see fit to consult. There is clearly a view that not all the interested bodies have been consulted.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend for his intervention, because it takes us back to our amendment, which simply asks for further discussion with developing countries before the assessment comes into play and before a resolution is laid before and approved by the House. Again, unless I am mistaken—the Minister will have an opportunity to tell me if I am—the only people who have been consulted are the businesses themselves. There has been no discussion with other nations, organisations or volunteer agencies about the proposal, apart from the Minister’s helpful production of the clauses in December last year, which led to the response that I have brought to the Committee today from ActionAid, which indicates that it is concerned about a £4 billion loss of income to developing countries as a result of the proposals.

Again, if that figure is wrong, the Minister needs to tell me why and to give me some detail, rather than, as appears to be the case in the FOI request, simply saying that it is wrong because it is wrong. I need to know whether he thinks that that £4 billion is wrong and whether he believes that the tax situation will be accordingly disadvantageous for developing countries.

In considering this matter, I would welcome the Minister’s comments on another issue, which relates to the position with the European Union, which I know is a favoured institution of the Minister and one that he pays full tribute and honour to at every opportunity. He will know that in mid-May, either just before or just after the start of the recess, the EU passed some comment on the imposition of the CFC rules. I have a quote from a news article written at the time—I also have the EU statement, which I will find in a moment, somewhere in my pile of papers—which states:

The UK must amend its legislation on the tax treatment of controlled foreign companies, as it fails to fulfil European Union (EU) Treaty obligations or adequately take into account relevant court rulings, the European Commission has said. The formal request was made on May 19, and takes the form of a reasoned opinion, representing the second step in EU infringement proceedings. In particular, the Commission points to the continued taxation of the UK profits of subsidiaries established in the EU or in member states of the European Economic AreaThe Commission stresses  that the UK’s legislative response to the landmark Cadbury Schweppes case in 2006 does not eliminate the discriminatory restriction of the anti-abuse CFC regime, as the rules fail to exclude from the CFC regime all subsidiaries established in EU/EEA member states which are not purely artificial”.

We need a response from the Minister on the latest second-stage proposal from the EU. I have found the European Commission document, “Taxation: Commission requests UK to further amend its treatment of controlled foreign corporations”, which is dated 19 May. It states:

The European Commission has formally requested the United Kingdom to amend its legislation to better take into account the rulings of the EU’s Court of Justice on the tax treatment of controlled foreign corporations (CFCs). Despite the 2006 Court’s ruling in the Cadbury Schweppes case, the UK is still not complying with EU law on the freedom of establishment and free movement of capital.”

Whatever my view or that of the Minister, it is important that he give an update on how he intends to respond to that request.

It is also important for the Minister to indicate whether the type of case which I will now bring to his attention will be caught by the said CFC rules. I came across a helpful article in the Daily Mail. As you know, Mr Hood, the Daily Mail is always a sound journal, which never inflates its opinions in a wrong or discriminatory way on any matter. It is obviously a source of truth and justice on every issue. A City Focus article written by Mr Rob Davis entitled, “So that’s where your office is, Ivan” looks at the position of the world’s biggest commodity firm, Glencore, which has

“A nondescript office in an unremarkable street above a branch of Next” on the island of Jersey. It goes on to state that

“the holding company recently floated on the London Stock Exchange…paving the way for the £6.7bn listing.”

That is

“A far cry”— it says this in the Daily Mail, so it must be true—

“from its pristine operational headquarters in…Switzerland…a rather modest home for a multi-billion dollar enterprise.”

The article goes on to state that by basing itself in Jersey,

“Glencore avoids the Controlled Foreign Companies rules” of the UK. The Minister has a duty to respond to that. I am happy to supply him with the article if he wishes to look at it in detail. Why is Glencore, which is headed by Ivan Glasenberg and has a £6.7 billion listing on the London stock exchange, able to avoid CFC rules in the UK by basing and incorporating itself in Jersey instead of the UK?

On amendments 100 and 101, I want a full assessment of developing countries’ tax revenue before the proposals are introduced. The article states:

“the firm paid £142m in income tax on profits of £3.2bn, but incurred…no corporation tax because it was structured as a partnership, owned by its staff”,

and avoided CFC rules

“by virtue of this ‘office’ in Jersey”.

It continues:

“it will make no contribution…to Britain’s sparse coffers.”

Far be it from me to support something the Daily Mail has said. It has, however, drawn attention to the fact that, however the CFC rules work, they have the potential, according ActionAid, to be disadvantageous to developing countries. The Daily Mail article of 1 June shows that the CFC rules potentially allow Glencore not to contribute to the UK economy, as it can base itself in Jersey to avoid them. Will the Minister comment on that?

Photo of Ian Mearns Ian Mearns Labour, Gateshead 11:00 am, 7th June 2011

I wonder whether the Government consulted Glencore on this issue. How does such a story show the ordinary people of the United Kingdom that we are all in this together? It is quite clear that we are not.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

In Glencore’s defence, my hon. Friend will be pleased to know that it has said it is not gaining a tax advantage but simply avoiding a tax disadvantage. What it has done is perfectly legal. That is the way of the world. I do not know whether it was consulted. Perhaps the Minister could tell me who was consulted on these proposals and what responses he has had to his publication in December of the draft clauses. It is not just the potential loss of £4 billion that ActionAid predicts; companies are also basing themselves in areas where the CFC rules do not apply. Before we give credence to the clause and schedule, and to clause 48 and its schedule, the Minister needs to tell us what he thinks the financial impact of these proposals will be on developing countries.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

As a member of the International Development Committee I spend a lot of time talking to people about why and how the UK gives aid. Is my right hon. Friend aware of the anger that exists when the Government appear to have policies that go against developing countries that could save all of us money, and how frustrated people are when things are not thought through properly, leading to such disadvantage to developing countries?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes an extremely important point. The UK owes a historical debt to many countries throughout the world. Much of the wealth and prosperity that we have shared in this country—and which has helped us to develop things in this great city of London, in my home city of Liverpool and elsewhere—has been made through the exploitation of what are still developing countries. We have taken physical or economic resources out of those countries to build up our country. We therefore have a moral duty to ensure that we do not just help and support developing countries through economic aid given by DFID and through other Departments, but that we look at the tax regime and how it helps them to build a strong tax base which they can use to build up their infrastructures.

In responding to the debate, the Minister needs to give his assessment of the financial impact of the proposal on developing countries, and whether he agrees with the ActionAid £4 million figure. He needs to tell us what consultation on the changes he has had outside business—with developing countries, with non-governmental organisations working in developing countries and with international bodies. He needs to tell us what help and support he will give across Government to help increase capacity building for corporate taxation in developing countries. He should also look at helping to develop the  agenda for country-by-country financial reporting, which will expose where multinationals pay tax, and to whom and where they do not pay tax.

The Minister will know that in government my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) was instrumental in getting this issue on the global agenda in the London G20 summit in 2009. My right hon. Friend the Member for East Ham (Stephen Timms), when he was a Treasury Minister, supported calls for better information exchange on country-by-country reporting and built an OECD agenda on this. It is important that the Minister indicate how he is going to build on Labour’s leadership in that area for future G20 discussions, to ensure transparency on taxation and that the rules do not disadvantage developing countries. I would be grateful to hear from him and from any other Members who wish to expose related issues.

Photo of David Gauke David Gauke The Exchequer Secretary

It is a pleasure to serve under your chairmanship again, Mr Hood. I also join the right hon. Member for Delyn in congratulating my hon. Friend the Member for Elmet and Rothwell on his wedding over the recess—clearly the political wedding of the period. I congratulate him and Mrs Shelbrooke.

I turn to clauses 47 and 48 and the related amendments. It is worth putting the matter in context. As part of the aim to attract and retain private sector investment in UK, the Government are undertaking a significant programme of corporate tax reforms. Those reforms will mean a competitive and stable tax system providing business with the confidence to invest and expand in the UK.

Clause 47 introduces improvements to the controlled foreign company rules to make the current rules easier to operate ahead of full reform in spring 2012. Clause 48 introduces reforms to the taxation of foreign branches to align their tax treatment with that of subsidiaries.

I welcome the broad support that the right hon. Gentleman gave at the beginning of his speech. He highlighted that the previous Government spoke about moving towards a more territorial system. As the speech went on, the level of his support seemed to diminish, and I am not entirely clear whether the official Opposition support what we are trying to do with CFCs and foreign branches.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I can help the Minister. I have said that we support the general direction of travel, as it is one that we commenced. The crucial difference is that, although we commenced the direction of travel, we had not reached the stage we are now at, where there has been no assessment of the cost or consultation with developing countries. I want clarity on those issues before we agree to support the clauses.

Photo of David Gauke David Gauke The Exchequer Secretary

I would perhaps draw another distinction between the period when the previous Government were in power and now. During the previous Government’s time, a number of multinational businesses redomiciled out of the UK. Since the announcements on this matter, we have had indications from the likes of WPP that it is coming back. That is the biggest distinction that can be drawn.

Reforming the CFC rules is a key change, needed to create the most competitive corporate tax system in the G20 and to encourage more businesses to be based in the UK. The question of CFC reforms’ impact on developing countries has been raised during engagement on the CFC reform proposals with ActionAid and other interested parties, and we have considered that issue carefully. The UK’s CFC rules are designed, and always have been, to protect the UK’s tax take from the artificial diversion of profits overseas. Similarly, other countries have CFC rules that are designed to protect their local tax bases.

The changes to the taxation of foreign branches in clause 48 include rules that ensure that profits to be exempt must be properly attributable to branches, and result from genuine economic activity in the relevant jurisdiction. That will prevent profits artificially held in other jurisdictions, including the UK and developing countries, becoming exempt. Therefore, the changes to the taxation of foreign branches will have a negligible impact on developing countries. The UK is committed to helping developing countries to reduce tax avoidance and protect their own tax base. Our corporate tax system is not the best way to help those countries; it is designed to protect the UK’s taxing rights, not those of other countries. Rather, it is for the countries themselves to have effective systems that build and protect their own tax base, and to ensure that they can access and act upon tax information.

As the hon. Member for Wirral South has said, the UK provides considerable support to developing countries through DFID and Her Majesty’s Revenue and Customs to provide robust, fair and sustainable domestic taxation systems. The right hon. Member for Delyn is right that administrative capacity is important for developing countries. That is where our focus lies.

Our tax-capacity building work and technical assistance help to ensure that developing countries are in the best position to collect the tax they are owed. We are helping them to design and operate their own tax rules effectively so they can assess and collect the tax that is properly due. Furthermore, at their last meeting, G20 Finance Ministers urged jurisdictions to extend further their networks of tax information exchange agreements. They also encouraged jurisdictions to consider signing the multilateral convention on mutual administrative assistance in tax matters to ensure that developing countries can benefit from improvements in tax transparency.

The Government do not consider that a full impact assessment of CFC interim changes and the reforms to foreign branch taxation on developing countries’ tax bases would be appropriate. Such an impact assessment would need to focus primarily on the nature of tax regimes in the developing countries, making it an assessment not of our tax rules, but of the tax rules of other countries. Such an assessment would not be relevant to the task of creating the most competitive corporate tax system in the G20 and encouraging more businesses to be based in the United Kingdom.

A question was asked about the £4 billion assessment of the cost to developing countries of CFC and branch reform. It is not clear how that estimated cost has been calculated. Initial analysis undertaken by the Treasury and HMRC indicates that the £4 billion is a significant  overestimation. Making any analysis of the impacts across a range of countries where the information is not readily available is inherently difficult and uncertain. Any attempt to estimate the interaction between changes to the UK tax rules and tax revenues in other countries will involve a number of assumptions. The Government do not think that any such calculation would be sufficiently robust or accurate to be of value.

The Government are committed to providing advice and guidance to developing countries to enable them to create and maintain their own effective tax regimes. That approach should ensure that those countries have appropriate taxing rights over businesses that operate there.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 11:15 am, 7th June 2011

When did the Treasury undertake the analysis of those matters? If the £4 billion figure is not correct, what cost has the Treasury ultimately settled on?

Photo of David Gauke David Gauke The Exchequer Secretary

As I have just said, the Treasury’s view is that it is not possible to come up with a number that is sufficiently robust or accurate to be of value.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The FOI e-mail of 16 March from Treasury official blank to Treasury official blank and DFID official blank, which I have before me, says that

“we… have not done any work on this.”

Has the work been done since 16 March? If the officials had not done any work on it by 16 March, when was the work done?

Photo of David Gauke David Gauke The Exchequer Secretary

I will not give the right hon. Gentleman precise dates, but initial analysis has been undertaken by officials. The advice I have received is that the £4 billion figure is a significant overestimation. It is difficult to come up with a definitive number, however, because of the complexities and uncertainties involved, but on the face of it, the ActionAid number does not bear a great deal of scrutiny.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

I understand the Minister’s difficulty in being clear about the numbers, but the numbers are important. If it is clear that £4 billion is too much, are we talking about £1 billion, £2 billion or £3 billion? What order are we talking about?

Photo of David Gauke David Gauke The Exchequer Secretary

As I say, it is not possible to come up with a number because of the uncertainties in this area. The initial view is that the £4 billion figure is a significant overestimation and that it is not possible to come up with a robust number to provide the detail that hon. Members want.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The Minister will recall that amendment 100 says that the schedule

“will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons”.

All we ask is for that assessment to be done, a figure to be produced and the House of Commons to say, “Thank you very much, Minister. We support it or we do not.” At the moment, he is asking us to pass legislation when he cannot give a figure on the impact on developing  countries’ tax bases, and that at the same time, as my hon. Friend the Member for Wirral South pointed out, that DFID is trying to do exactly what the Minister is trying to undertake in a different form.

Photo of David Gauke David Gauke The Exchequer Secretary

As I say, it is not possible to provide a precise number. There is simply too much uncertainty; it would involve an understanding of the interaction between changes to the UK tax rules and tax revenues in other countries, which involves a large number of assumptions, some of which would inevitably be somewhat questionable. As a consequence, we do not believe that we could come up with a calculation that would be sufficiently robust or accurate to add any value to the debate.

I also make the point that the purpose of the CFC regime has always been about protecting the UK’s tax base, not to assist developing countries. The better way to do that is by building up tax capacity, which is what DFID and HMRC are doing, putting considerable resources into it. The Government are delivering on the commitment to spend 0.7% of GNP on international development, something never done before and on which we lead the world.

Photo of Paul Blomfield Paul Blomfield Labour, Sheffield Central

I want to press the question of the £4 billion. ActionAid is clearly a credible organisation, with which the Minister suggested there have been discussions. It came up with the figure of £4 billion, on the basis of its own analysis. If, as the Minister says, it is not possible for the Treasury to come up with a sound assessment, on what basis does he rebut ActionAid’s figure of £4 billion?

Photo of David Gauke David Gauke The Exchequer Secretary

This is an area where large numbers often get thrown around. They can attract the eye, but do not necessarily stand up to greater scrutiny. The Treasury’s view, based on initial analysis, suggests that that figure is a significant overestimate of the cost.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

I want to be clear, because any projection concerning the economy using previous behaviour to predict future behaviour involves a large number of assumptions and is inherently full of risk. This week’s International Monetary Fund projections drew attention to the risks around its calculations. Is the Minister saying that this matter involves extra complexity, or is he saying it is complex and the Treasury does not wish to commit resources to do that bit of modelling?

Photo of David Gauke David Gauke The Exchequer Secretary

To come up with a precise number, we would have to have a definitive and exhaustive understanding of the tax systems of all the developing countries likely to be affected. The Treasury does not have that, nor is it likely to acquire it. The purpose of the CFC regime is to protect tax revenue within the UK. The best way to assist developing countries is to improve their tax capability, by improving their administrative capability. The Government do that and put in a lot of effort, as the hon. Lady mentioned.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

The Minister is generous in giving way. Can I be clear? He says that we could not get hold of that information. Has he checked with DFID colleagues?  It is highly likely that a global financial institution such as the World Bank, which we fund, would have access to that information.

Photo of David Gauke David Gauke The Exchequer Secretary

I dispute the “highly likely” assessment; that is a bold assumption in itself. This is an area where it is not possible to provide the precise numbers. We think that the methodology used by ActionAid results in a significant overestimate.

Nic Dakin rose—

Photo of David Gauke David Gauke The Exchequer Secretary

I shall give way one last time, but we have gone round the track on this a few times.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

I thank the Minister for his patience in allowing us to probe him a little further. He said earlier that the Treasury has analysed this, and I understand the complexities he describes. In the interests of transparent and open government, is he happy to share the Treasury’s analysis so that we can see exactly the point he is making and agree with him?

Photo of David Gauke David Gauke The Exchequer Secretary

As I say, it is an initial analysis without the full body of work, which would be considerable and possibly not something that could even be achieved by the Treasury. There was an initial assessment after 16 March and the view is that that figure is a significant overestimate. That is not unusual in this field, where large numbers tend to be thrown around about tax avoidance and tax gaps, and where the methodology frequently does not stand up to great scrutiny.

All consultation documents are published on the Treasury website with an open invitation for responses. Officials can engage with businesses and professional firms with experience of a range of clients when developing policy. Indeed, that is something that this Government have strengthened and improved. We are committed to consulting on tax policy reforms and will set out our approach to that. Again, that has been welcomed by the right hon. Member for Delyn. Effective consultation helps to ensure that changes are well targeted and have no unintended consequences, and that the legislation is right first time. The Government engage with parties that will be affected by policy changes as that provides a better understanding of the impacts of those changes on business and on the Exchequer.

I have met with representatives of NGOs and officials from DFID to discuss country-by-country reporting. If anyone wants to respond to consultations, they can do so. The consultation on CFCs, which will inform the legislation that we are likely to have before us next year, will be published later this month. We will reflect on the comments from the EU in that consultation and we want to ensure that the consultation is as well developed as possible. I know that the right hon. Gentleman is anxious to read every page of it, but he will have to wait another week or so.

Delaying the introduction of these clauses would create further uncertainty in this area of reform. Businesses have been waiting for the CFC reforms to be concluded since 2006 and this uncertainty has been blamed for driving some businesses out of the UK. The introduction of branch exemption in this Finance Bill will allow those in the insurance sector to restructure before the  Solvency II EU regulatory changes. Delaying the legislation would undermine the Government’s commitment to certainty of tax treatment. Therefore, these clauses should be introduced without delay, as a certain and competitive tax system is crucial for private sector investment and growth. I therefore ask the right hon. Gentleman to withdraw the amendment.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 11:30 am, 7th June 2011

I am afraid that I am not very happy with the Minister’s response. He has not addressed the points made by my hon. Friends the Members for Gateshead, for Sheffield Central and for Wirral South. We fully accept that this is about helping to repatriate taxation to the UK and ensuring that taxation in the UK is fair, and we wish that general move well. I must say, however, that there is a potential consequence for developing countries, and ActionAid has estimated that to be some £4 billion. I remind the Committee that no work had been done on that figure by 16 March, according to a HMT official at 18:39 in e-mail chain A, which I must take at face value, to a DFID official and another HMT official regarding CFCs and ActionAid’s point, and the Minister is saying that an interim assessment was undertaken between 16 March and now.

All we are asking is for the Minister to tell us precisely what that interim assessment shows, because he is asking us to commit the House of Commons to supporting clause 47 and, shortly, clause 48, which impact on CFCs. If we are to believe ActionAid—why should I not believe an NGO such as ActionAid?—which has worked on this, the clauses could cost developing countries £4 billion. If that is true, it is a considerable amount of money for those countries.

I have no reason to disbelieve ActionAid, but I was willing to give the Minister the benefit of the doubt and let him say to me that ActionAid’s figure is wrong, that he has done a proper assessment and that the figure is £2 billion or £1 billion, or even that there is no impact at all. However, he has not yet been able to put any definitive figure on the impact on developing countries. I remind the Committee of the only thing that we are asking for in amendment 100:

“Notwithstanding the provisions of paragraph 14 of Schedule 12, the Schedule will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.”

All we are saying is, “Please, Minister, make an assessment of what the impact is of this particular clause on developing countries.”

ActionAid has given just one example. In Ghana, which is not one of the world’s richest countries,

“one pound in seven of tax revenue comes from corporate taxation, mostly from large taxpayers including subsidiaries of UK multinationals.”

I do not know what the impact of the clause will be on Ghana. Can the Minister tell me today what impact it will have on Ghana’s developing tax base? If he cannot, why is he refusing to accept amendment 100 and why is he not allowing us a full impact assessment of the effect on the tax revenue of developing countries? I do not want to vote for something that could impact on one seventh of the tax revenue of the state of Ghana, which is one of the poorest countries in the world.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I hark back to when the Minister was replying to the debate and he reiterated the Government’s commitment to 0.7% of GDP going to overseas aid, but that will be self-defeating if UK companies with bases abroad are to default on their tax in third-world countries. What is the point of helping countries with up to 0.7% of British GDP if we then deduct from their other revenues?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes an important point, because many developing countries, according to ActionAid—if I am to believe what it says, this is a correct figure—do not receive even 15% of their national wealth in tax from corporate businesses, because they do not have the capacity or the organisation to do so.

Amendment 100 does not mean that we do not want the clause to progress or that we do not agree with the direction of travel of repatriating businesses to and keeping them in the United Kingdom. It simply asks what the impact will be on developing countries. If it is not the £4 billion that ActionAid states, what is it?

Photo of Alison McGovern Alison McGovern Labour, Wirral South

Does my right hon. Friend share my concern that the Minister’s responses to my interventions demonstrated a lack of understanding of how we could find out the answers to some of those questions? In the case of Ghana, which my right hon. Friend mentioned, we could ask the Royal African Society, experts at DFID or experts at Chatham House. There is a range of people who might have the answer to that question, but the Minister did not seem inclined to ask them.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

It is interesting that the Minister can give an indication and some figures, which I quoted to him and which he has not contradicted, on what the cost will be in the United Kingdom, but he cannot give an indication of what it will be in developing countries. I have the help and support of ActionAid to raise these issues, and I have one researcher; the Minister has the whole of the Treasury. When I was a Minister, if I wanted to know something I would ask officials, who would go away and produce information. If I pressed them hard enough, they would produce a report on such matters for me.

I will withdraw the amendment if the Minister tells me that, between now and consideration on Report, or by Royal Assent, he will look at these issues and produce an assessment of ActionAid’s figures, and that he will consider the matter in more detail than has been the case since 16 March. I remind the Committee that no work has been done on this, as the HMT official told the DFID official on 16 March in the e-mails that I quoted. I am sorry to say that it seems as though no assessment whatever has been made of the impact of these changes.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

The Minister has indicated that an analysis has been done that was clear enough to demonstrate that £4 billion is way off the mark. Would my right hon. Friend find it helpful if the Minister shared that analysis with him, according to the principle of open and transparent government?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend for that intervention. As I said, if the Minister were to do so, I would withdraw the amendment, in which we request

“a full impact assessment on developing countries’ tax revenue”.

If analysis has been done that shows that £4 billion is not the correct figure, perhaps the Minister will share it with me now or make a commitment to place a copy in the Library of the House. Let us be fair to him and say that he should do so by 30 June, which would give him time to consider the matter, include a few more blanks like the ones in the e-mail chain and delete appropriate individual names. We could have an assessment of what that £4 billion really is. I shall support the measures, but I am not willing to do so until we know what the impacts will be.

I hope that the Minister will accept the amendment. We will reflect on the measures after that, but I hope he will accept the suggestion of a full impact assessment. If he does not, he is saying to the Committee and to the House that we will support clause 47 even though we do not know what that means for Ghana and other developing countries, and we do not know what it means for those whom ActionAid seeks to support. For those reasons, unless he gives me further comfort, I do not feel minded to withdraw the amendment. I am ever the optimist, however, and am hopeful that when I sit down, the Minister will stand up and agree that the amendment has some merit, so that I can withdraw it on the basis of assurances received from him following the interventions made by my hon. Friends.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

When the right hon. Gentleman sits down, the Chairman stands up. I understand that he wants to press the amendment to a vote.

Question put, That the amendment be made.

The Committee divided: Ayes 11, Noes 18.

Division number 8 Decision Time — Clause 47 - Controlled foreign companies

Aye: 11 MPs

No: 18 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss the following: Government amendments 118 to 122.

That schedule 12 be the Twelfth schedule to the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 47 and schedule 12 introduce improvements to the CFC rules, which will make those rules easier to operate and more competitive, where possible, ahead of full reform in 2012. The existing CFC rules protect the Exchequer from the artificial diversion of UK profits to overseas low-tax jurisdictions, but those rules could be modernised better to reflect the way that businesses operate in a globalised economy, while ensuring that adequate protection for the UK tax base is retained. As a result, CFC reform is a key part of the corporation tax changes that we set out in the corporate tax reform document, which was published in November 2010. The changes in clause 47 are the first step towards a CFC regime that helps to achieve our aim of having the most competitive corporate tax system in the G20 and providing the right conditions for business investment and growth. That will be achieved by adopting a more territorial approach that refocuses CFC protection on artificially diverted UK profits and gives groups greater freedom to manage overseas operations.

The clause introduces three new exemptions. The first provides more certainty for business by removing certain intra-group trading activities from a potential CFC charge—intra-group service companies, for example—where a risk is not posed to the UK tax base. The second exempts CFCs that derive their profits from foreign intellectual property, where, similarly, a risk is not posed to the UK tax base. Those two exemptions provide certainty to UK multinationals that such commercial overseas operations, which could be caught be the current rules, will be exempt ahead of full CFC reform in 2012.

The third exemption provides an exempt period of up to three years for overseas subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime. That will provide a group with appropriate time to reorganise its overseas affairs, so that it complies with UK CFC rules. The aim is to make the UK a more attractive location for headquartered companies, and for the UK investment that can arise as a result of that, as well as assisting UK businesses that undertake overseas acquisitions.

The third exemption is subject to amendments that correct a technical defect that was included in the original draft legislation, but which has only recently been identified. The defect concerns the conditions that a foreign subsidiary must meet if it is to qualify for the exemption. As drafted, the requirements relating to control of the subsidiary are more tightly drawn than intended, and they could prevent such subsidiaries from benefiting from the exemption in circumstances where they should be free to do so. The amendments address those unwanted restrictions and ensure that the exemption will work as intended.

A further change made by clause 47 provides an alternative to the exemption for CFCs with low profit levels. The threshold for the new de minimis exemption is £200,000, which is four times the threshold of the existing test. To reduce the compliance burden, the measure of profits is based on the CFC’s accounts, rather than on its taxable profits. Finally, the transitional rules for exempting certain types of holding company have been extended by one year. Those final two improvements aim to ease the compliance burden of the existing rules. The changes take effect for accounting periods beginning on or after 1 January 2011, apart from the extension of the transitional holding company rules, which is deemed always to have had effect.

This measure has been subject to an open and transparent consultation on both the general principles and the detailed clauses. Following an initial announcement in June 2010, we published detailed proposals on 29 November 2010 as part of the corporate tax reform document. Draft legislation was published on 9 December 2010 for consultation. Representative bodies, companies and firms of professional advisers provided more than 20 responses to the draft legislation. The Bill published on 31 March included a number of changes reflecting those responses. Those changes include relaxing several of the conditions for the intra-group trading and intellectual property exemptions to ensure that they achieve their proposed objectives.

Reforming the CFC rules is a key element of a competitive corporation tax regime. We have already had clear signs that businesses see our CFC reform proposals, including the changes made by this clause, as evidence that the UK’s corporate tax system is once again becoming an attractive environment for international business.

[Ian Murrayin the Chair]

I move that this clause and this schedule, as amended, stand part of the Bill, Mr Murray. May I say what a pleasure it is to serve under your chairmanship.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

May I say what a surprise and what a pleasure it is to see you in the Chair, Mr Murray.

I am content with the Minister’s explanation. We had a good debate on amendment 100, which was defeated. Despite my strong and deeply held reservations on the need to consult and assess developing countries, we will not vote against clause stand part or the schedule.

Question put and agreed to.

Clause 47 accordingly ordered to stand part of the Bill.