The Committee consisted of the following Members:
Matthew Hamlyn, Committee Clerk
† attended the Committee
(Except clauses 16, 17, 43 and 45 and schedules 2 and 3)
The Financial Secretary to the Treasury (Mr David Gauke): It is a great pleasure to serve under your chairmanship once again, Mr Howarth. Welcome to what may prove to be a briefer sitting than you were anticipating. I hope that that does not upset your plans too much.
The hon. Member for Wolverhampton South West raised a concern that the clause might permit aggressive tax planning or tax avoidance by multinational companies, and that a consequence could be lost revenue to the Exchequer. Let me reassure him. We believe that the clause will have a negligible impact on the Exchequer, but it will simplify the UK tax system. To some extent, if the existing rules were designed to deal with tax avoidance, they were not going to be able to do that effectively anyway because companies could put in a European economic area or UK-linked company.
We do not think the clause opens up a particular vulnerability in any event, but the hon. Gentleman made an important point about ensuring that our tax system is fit for purpose in a world in which multinational companies have choices and can structure themselves in particular ways. That is why the UK was keen to encourage the OECD to look at the international tax system as part of the base erosion and profit shifting project. That project reported recently; it was debated by G20 Finance Ministers at Lima last week and recommendations have been taken on board. As my right hon. Friend the Chancellor of the Exchequer has made clear, the UK will implement the BEPS recommendations.
There is an important point, but I do not believe that it is relevant to the clause. The Government remain determined that the international tax system should ensure a closer alignment between economic activity and taxing rights. That is the key to the BEPS reforms, which is an agenda we are keen to push forward.
Rob Marris (Wolverhampton South West) (Lab): There is a difference between something that affects those currently trading in a particular way and the actions that a group of companies might take in the light of a changed tax regime. Is the Minister confident that a change of behaviour through company restructuring following the changes in the clause is unlikely because there will not be much of a loss of revenue from linked companies and so on, and there will not be a change in behaviour that will lead to such a loss in the future?
Mr Gauke: We do not believe that there will be a change of behaviour that will lead to a loss of revenue as a consequence of the clause. I hope that that provides reassurance to the hon. Gentleman and to the Committee.
Mr Gauke: Clauses 35 and 36 make changes to prevent the offsetting of UK losses and other surplus expenses against tax that should be paid by UK companies in accordance with the reformed controlled foreign companies rules. That will improve the effectiveness of our CFC regime in countering aggressive tax planning by UK multinational groups while maintaining the competitiveness of the UK corporation tax regime.
The CFC rules are designed to protect the UK corporate tax base from the artificial diversion of UK profits to low-tax jurisdictions. The rules were extensively reformed in 2012 during the previous Parliament as part of the corporate tax road map, which provided the protection necessary for a more territorial corporate tax base while ensuring that the rules operate in a way that reflects modern global business practices.
A CFC charge arises on a UK company in relation to CFC profits that have been diverted from the UK. Under the CFC rules, UK losses and other surplus expenses could be set against profits taxable under the CFC rules, which can reduce or eliminate the amount of UK tax actually paid on those diverted profits. The Government believe that tax should be paid on profits diverted from the UK. These changes will ensure that that happens.
The changes made by clauses 35 and 36 will remove the ability of a UK company to reduce or eliminate its CFC charge by offsetting UK losses and surplus expenses against that CFC charge, which will improve the effectiveness of the CFC regime in deterring the diversion of profits from the UK by ensuring that those profits are taxed. The changes made by clauses 35 and 36 apply to corporate entities, not individuals. They will apply with effect from 8 July 2015 to UK-resident companies that hold an interest in a CFC on which a CFC charge will arise. The changes will mainly affect large UK multinational groups with overseas subsidiaries. The changes will raise an estimated £860 million in additional tax receipts over the next six years.
The reform of the CFC rules in 2012 was an important part of corporation tax reform. These clauses ensure that the CFC rules work as intended by preventing UK losses or other surplus expenses from reducing or eliminating the amount of UK tax paid on diverted UK profits. The changes are in line with our broader corporate tax policy objectives, which seek to balance competitiveness and fairness.
I wish I had thought of clauses 35 and 36 myself. They contain great anti-avoidance provisions, for which I again salute the Government. I understand that they seek to ensure that the CFC legislation operates as intended. There is one sting in the tail—I may have misunderstood—but clause 35 addresses loopholes that have been exploited since the introduction of provisions in the Finance Act 2012. That does not instil great confidence in the creation, drafting and passage of that legislation. The more so with clause 36, which—again, I may be mistaken—attempts to close a loophole or dissuade companies from a course of conduct with their tax affairs pursuant to rules that were introduced by the Finance Act 2015. If that be the case, I am concerned that the House is repeatedly battling against aggressive tax avoiders. If it be the case that we are amending legislation introduced about six months ago to close a loophole, we are not doing as well as we should be and might be on countering the actions of aggressive tax-avoiding companies, which is a goal shared on both sides of the House. Although the different ways one might do that may be the subject of debate, the goal that companies should pay their fair share of tax is a shared goal. Again, we can debate what is a fair share of tax, but loopholes appear to be popping up all over the place at very short notice, which is a concern.
Mr Gauke: I again thank the hon. Gentleman for supporting the content of these clauses. I have general and specific points to make in response to his comments. He is right that there is a consensus across the House that aggressive tax avoidance should be tackled. Although he was on sabbatical for the previous Parliament, he will be aware that measures designed to deal with that matter were brought forward in the previous Parliament. A lot of the work that needed to be done in the context of large multinationals is essentially of a multilateral, international nature, and we have pursued that agenda through the BEPS project, which I mentioned a moment ago, so there has been a determination on that front.
We brought in measures over the previous Parliament, as have previous Governments, to address what could be described as loopholes in domestic legislation. Her Majesty’s Revenue and Customs has also been very effective in collecting more tax from large businesses. The position of tax administration at HMRC has ensured that those revenues are collected.
If I were to argue against the provisions for a moment, I could say that a UK company can set its losses against UK profits, so why can it not also set its losses against profits that have been diverted from the UK? We are not persuaded by that argument, hence the measures in front of us. The provisions are consistent with our wider policy of protecting our corporation tax base against the diversion of UK profits, which is consistent with our approach to the diverted profits tax, for example. It is right to take action, but it is also right to ensure that we get the balance right between fairness and competitiveness. As evidence has emerged of particular practices that companies pursue, it is right to make adjustments as and where necessary ensure that legislation reflects those twin objectives of fairness and competitiveness.
Rob Marris: Can the Minister indicate when the Government will push forward hard on what they have said that they will do on transparency of beneficial ownership of companies in tax havens and so on? Anecdotally, there is quite some evidence of tax avoidance, which the introduction of that transparency could lessen. The Opposition want it and the Government say they want it, but it appears to be slow in coming.
Mr Gauke: The hon. Gentleman takes me into wider matters, but I am happy to respond even though it takes me a little way from clauses 35 and 36. The UK is leading the way by introducing a central register of beneficial ownership. That issue relates more to tax evasion as opposed to tax avoidance. We are encouraging other jurisdictions, including overseas territories and Crown dependencies, to move in the same direction as the UK.
On the subject of transparency and tax avoidance, the hon. Gentleman will be aware that one of the earlier recommendations from the BEPS project was on the introduction of county-by-country reporting information that goes to tax authorities. To ensure that we made progress on that front, we debated it before the conference recess. Such a measure would be more helpful and beneficial to tax authorities than a different arrangement. They could more easily assess a multinational’s tax affairs around the world and understand whether significant profits located in a low-tax jurisdiction might be indicative of a need for a closer look at the tax affairs of that multinational company.
Returning to the clauses before us, the hon. Gentleman referred to the interaction with the loss restriction rules that were introduced in a previous Finance Bill this year. The measure amends the rules restricting the use of carried forward losses introduced in the Finance Act 2015 to put it beyond doubt that those rules apply to arrangements involving CFCs. The measure is in addition to and, I would argue, complementary and consistent with the previous legislation. It puts it beyond doubt that that anti-avoidance measure applies to CFCs.
I hope those points are helpful to the Committee. We are determined to ensure that the UK is a competitive place in which to do business. The reforms of the CFC regime that we introduced in the last Parliament have helped the UK to attract additional business and more headquarters have been located in the UK. It is also right to ensure that those reforms do not go beyond what we intended and leave open opportunities for tax avoidance. The clauses are evidence of our determination to address that matter and I hope they will stand part of the Bill.