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European Community (Taxation)

Volume 958: debated on Wednesday 15 November 1978

The text on this page has been created from Hansard archive content, it may contain typographical errors.

I have to announce that Mr. Speaker has selected the amendment on the Order Paper.

9.15 p.m.

I beg to move,

That this House takes note of Commission Document No. R /1123/78 on Mutual Assistance in the Field of Direct Taxation.
In the Finance Act this year we legislated for the exchange of information on direct taxes between the member States of the Community either on request or in certain circumstances automatically. What concerned us was the important problem of dealing with the transnational companies. They were really what the mutual assistance directive was designed to deal with.

Transnational companies are large and increasing and both their size and expansion are inevitable. They are valuable in the spreading of technological advance, and they confer benefits upon their host countries. But with this increasing power they have the ability to play off Governments one against the other and to make use of the differences in the tax treatments between the various countries in which they operate. They have the resources and the expertise to discover anomalies in tax law and to use them to their own advantage. That is an inevitable consequence of their international nature.

What is therefore required is a matching increase in power on the part of the Governments concerned. Naturally, in order to make this work, there needs to be considerable co-operation between the member countries concerned. That is not always possible, because the countries concerned are in an ambivalent position. Many try to attract such transnational companies and offer inducements in the way of tax incentives and grants. Acting in this way, nation States are natural competitors one against the other.

On the other hand, countries need to co-operate against tax evasion, and the mutual assistance legislation reflects their desire to bring these powerful companies under control. The essential aspect of that control has to deal with the ability of these international companies to switch profits to those countries where the tax climate is most favourable for the particular transactions concerned. So in the Finance Act earlier in the year we extended our existing powers to deal with the transfer pricing of multinational companies. We are achieving increasing success in this area, in particular through the work of the special transfer pricing unit, which I described in my reply to a Question by my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker).

The argument for the greater supervision of the financial affairs of multinational companies and the need for international assistance in dealing with tax avoidance and tax evasion was accepted by the House of Commons in July.

The position now is that the Inland Revenue may exchange with other Community member States information relating to income tax, corporation tax, capital gains tax, petroleum revenue tax, development land tax and similar direct taxes operating in the other member States.

The draft directive before the House this evening proposes that value added tax, which is an indirect tax, should be included in that list. In other words, it proposes that Customs and Excise should exchange information on VAT with the responsible authorities in other member States.

In most of the Community countries the two kinds of taxes—both direct and indirect—are dealt with by the same bodies, and even in the United Kingdom there is a limited interchange between the two. The directive would allow the same kind of information exchange to be applied throughout the community.

The right hon. Gentleman said that there was some limited interchange between the Customs and Excise and the Inland Revenue in this country. The explanatory memorandum states that VAT information could be exchanged to crosscheck income and profit and vice versa. Does that mean that under the directive there will be an internal exchange of information between the two tax authorities that there is not at present, or that there will be an exchange between the two authorities internationally which will still not exist internally?

In most of the countries concerned, the two taxes are dealt with by the same authority. In this country, the two taxes are not dealt with by the same authority, but there are limited interchange facilities. The right hon. Gentleman may be aware of the pilot schemes that have been initiated. The European countries of the Community go further than we would go. If we were to give them this information, it would go to both sides of the service, because in those countries they are the same.

For clarification—this is an important point—does that mean that Her Majesty's Customs and Excise will be able to receive back from its opposite numbers information transmitted to its opposite numbers from the Inland Revenue which it could not have received direct?

In practice, that would depend on the country concerned. I am being hypothetical here, because these matters are still open to discussion, but what could happen is that if this directive in its present form were to be implemented—I shall have some comments to make about that later—VAT information could be given to the other member State concerned and, of course, with its lack of discrimination between the two forms of taxes, direct and indirect, the interchange would take place. In this country, as I said, there is a limited form of such interchange.

Will my right hon. Friend clarify that? I understand now that it could go from the Customs and Excise in this country to those responsible for VAT in, say, Denmark, and as that country has similar authorities for both direct taxation and VAT it could then go to the direct taxation authorities in Denmark. What I am not quite sure about is whether my right hon. Friend followed the further point which was made by the right hon. Member for Down, South (Mr. Powell), which was that it could then go back from the Danish direct taxation authorities to the Inland Revenue in the United Kingdom. My right hon. Friend went only three stages and not four, as far as I can see.

My hon. Friend has chosen a rather bad example, because Denmark is one of the countries with arrangements similar to our own. However, if we exchange Denmark for, say, France or Germany, my understanding is that it would be pretty well as my hon. Friend said.

The information could go backwards and forwards, but clearly these are matters for discussion and debate in the future.

As I said, the draft directive before the House proposes that VAT, which is an indirect tax, should be included in that list. In other words, it proposes that Customs and Excise should exchange information on VAT with the responsible authorities in other member States.

In most of the Community countries, the two taxes—both direct and indirect—are dealt with by one body. Even in the United Kingdom there is the kind of interchange that I mentioned, and in particular the pilot scheme that has taken place in Leeds.

This draft directive has also been discussed at meetings at official levels in Brussels, but because the Select Committee recommended that the House should debate the matter, our delegates have reserved the United Kingdom's position until this debate has taken place. The Government wish to hear the views of hon. Members before finalising their own policy towards the draft directive.

At present there is, under the 1967 Naples convention, to which the United Kingdom acceded in 1974, provision for mutual assistance between customs authorities for the exchange of information concerning the collection of customs duties and other import or export charges. These charges include VAT on imported and exported goods. Therefore, there is that interchange which takes place at present. The draft directive would go beyond the provisions of the Naples convention. In particular, it would cover information on taxable activities inside member States.

As the directive largely duplicates obligations which exist at present, let me say, for the record, that I would not foresee any increase in staff costs were the directive to be implemented, at any rate in the short term.

Most other Community countries are in favour of the proposed extension of the mutual assistance provisions. They are concerned about evasion of VAT by multinational companies. In Britain we have so far encountered no major problems on VAT evasion arising from the activities of large multinational companies. For the other Community countries the draft directive represents a useful additional weapon against evasion, and for this reason they welcome it.

It is obviously important that any information supplied to or received from another member State is treated confidentially. The safeguards in the directive for both taxpayers and member States would apply similarly to VAT information, and information exchanged under the directive would obviously require to be kept as confidential in the receiving State as it is under its own domestic legislation. The receiving State must also observe the secrecy obligations of the supplying countries and must have regard to trade secrets.

The Commissioners of Customs and Excise consider that any facility to echange information could be helpful in dealing with VAT fraud. However, they advise that in practice the benefits of the obligations for the United Kingdom under the draft directive might not represent any considerable advance beyond what is already provided for under the Naples convention. I myself am sceptical about the advantage for Britain in further mutual exchange of information on VAT. I am sympathetic to the ideas behind the amendment. Of course I realise that other member States would welcome United Kingdom agreement in joining in what they would regard as their struggle against tax evasion.

Although I agree with much of the substance of the amendment, the last few words of it produce some problems. The phrase that the House of Commons "cannot accept such proposals" would completely tie the hands of any negotiator at the Council meeting. In fact, such a meeting would be pointless, as the decision would have been effectively made before the Council meeting took place. As I said. I am sympathetic to the ideas behind the amendment and I look forward to receiving the views of the House which will help us in coming to a decision on these matters.

9.26 p.m.

I beg to move, at the end of the Question, to add:

"but is not satisfied that the need has been established for the extension to value-added tax of proposals for disclosure to tax authorities outside the United Kingdom of confidential tax information, and cannot accept such proposals".
I was a little surprised and disquieted by the last few remarks of my right hon. Friend in relation to the last few words of the amendment. He appeared to argue that it is improper, or beyond the competence of this House, to put down an amendment to a motion of this kind which would require the Government to accept the decision of the House of Commons. I cannot really imagine that he was arguing that. If he was, it would be almost the first time since the days of Charles I that such a proposition was put forward. Indeed, it would be so remarkable that I cannot think that was really his intention. I do not propose to pursue that point very much further tonight, but I hope that we shall not hear that argument advanced again on a question of EEC legislation or, indeed, on anything else.

I presume that we are dealing with legislation. In other words, if anything in the form of this directive were to be approved by the Government as well as the EEC it would have to be embodied in United Kingdom law which would be binding on the subject in this country. Therefore, it is clearly a matter on which this House must be allowed to express an opinion.

As to the substance of these proposals, if I understood my right hon. Friend aright, he has grave doubts about the utility of them himself. Even the Inland Revenue, which one might assume a priori would like to have powers for gaining additional information, does not see any great value in them.

I think that my right hon. Friend said that he was sympathetic to the purposes of the amendment. Incidentally, he talked a great deal about multinationals. Men- tion of multinationals always creates a certain amount of prejudice, which I do not wholly share. But I presume that if these proposals became the law of the United Kingdom they would apply to any taxpayer and not just to multinationals. The right hon. Member for Down, South (Mr. Powell) can let me know whether I am wrong, but I do not think we should discuss them on the assumption that it is only these wicked multinational companies which would come under this law.

However, as I understood him, my right hon. Friend said that he is sympathetic to the purposes of the amendment. If that is so, and he can confirm it, I do not think that my hon. Friends or I would wish to press the amendment tonight. I would understand from his assurance that he is sympathetic to the purposes of the amendment that he will not go straight off to Brussels and accept the directive in its present form. I hope, also, that his assurance means that he will not accept it in its present form and that if it is substantially amended we shall have information about it and he will again consult the House before reaching any final decision.

On that understanding, and subject to what my hon. Friends or hon. Members on the Opposition Benches may feel, I do not wish to press the amendment further, though I hope that I shall be assured that I have a correct understanding of what the Financial Secretary said.

9.30 p.m.

In supporting the right hon. Member for Battersea, North (Mr. Jay) in his amendment, I shall briefly follow up the two points that he made and then make a number of others.

I am sure that the Financial Secretary cannot have intended to say that it was improper for the House to pass a resolution treating a certain EEC proposal as unacceptable. We have done it before to my certain recollection—I trust that we shall often do it again—and I should have thought that on constitutional grounds our right to do so and the necessity for any Government to give heed if we did so was unarguable.

Of course, if the Financial Secretary means that, he having expressed his general accord with our anxieties and his grave doubts as to whether anything of this kind is necessary or desirable, it will be easier for him to get it squashed if we do not pass a resolution in these terms as amended, that would be intelligible, and I think that that is probably broadly the purport of what he said. But it was open to misunderstanding, and I hope that the right hon. Gentleman will not mind the points which his right hon. Friend the Member for Battersea, North and I have made.

I take also the second point raised by the right hon. Member for Battersea, North, namely, that since the Financial Secretary is evidently sincere in the opinion which he has expressed, this must mean that, irrespective of any recommendation from the Scrutiny Committee or whether this goes back to the Scrutiny Committee, if there were any question, contrary to the general view which he has expressed on behalf of the Government, of a directive of this sort being accepted, the House would be given an opportunity to consider it again. I am sure that the right hon. Gentleman will, on consideration, see that that is implicit in the understanding which he gave to the House.

If those two points are taken, as the right hon. Member for Battersea, North suggested, the debate can continue in an atmosphere less critical than might otherwise have been the case. But there remain serious objections which ought to be voiced despite what the Financial Secretary has said.

As the form of the directive indicates, this proposal is a follow-up to the directive which was given the force of law in the United Kingdom by what became section 77 of the Finance Act of the present year, which was debated at great length both in Standing Committee and on Report on the Floor of the House. On that occasion the House was debating a clause in a Bill which under the terms of the treaty the Government were duty bound, if they could, to enact in order to give effect to a directive which had already received the approval of the Council and was Community law.

There is no doubt about that, and no one disputed it at the time. Nevertheless, in Standing Committee five hon. Members, three or four of whom certainly are not unfriendly to the principle of our membership of the European Economic Community, felt so strongly that they voted against the clause standing part of the Bill. Then, when the Bill came back to the Floor of the House, no fewer than 81 hon. Members, understanding perfectly well what the constitutional position was, nevertheless felt so strongly about the innovation being made in the removal of confidentiality under that clause that they went into the Lobby against it.

At that time, we already knew that the draft directive was following up the one to which we had just given legal effect. Reference was made to that fact in the debate. The Financial Secretary said:
"The United Kingdom has reserved its position on this "—
he has repeated that clearly tonight—
"and there will be further opportunity to examine the question at a later stage if it proceeds any further "—[Official Report, 13th July 1978: Vol. 953, c. 1878.]
It is worth drawing attention to the dangers implicit in this form of Community legislation because the House does not attend to the real substance of something which is being done at the crucial stage, which is now, when there are half a dozen hon. Members in the Chamber, but tends to take note of what has happened only when it sees the thing in legislative form in a United Kingdom form.

The contrast between the scene in the House late on the night of 13th July and the scene tonight is very instructive. It is not unlike the contrast between the attitude of the House to a general proposition about membership of the Community presented to it in October 1971 and the enormous difficulty that the then Government had in getting that translated into law when the House saw in a Bill exactly what was involved.

We now have an analogy to that, even though it is on a very small scale. In the case of the directive on the shoulders of which this directive is trying to climb, even our vigilant Scrutiny Committee did not suggest that the House ought to debate it and it was not previously debated by the House. We have the extraordinary fact that a directive against which, when it was enacted in a Finance Bill, 81 hon. Members voted—no doubt against a fairly strong Whip—was not regarded by the Scrutiny Committee as justifying at the proper stage even debate in the House, let alone a decision being come to.

Whatever view one takes—I am glad that tonight, as last night, there is so much accord between myself and the hon. Member for Farnworth (Mr. Roper), as the indubitable signals convey—it is not a satisfactory situation. It certainly means that we are not taking EEC legislation seriously enough at the formative stage. That is not the Government's fault, and it is rarely the fault of the Scrutiny Committee. But there is something wrong with a procedure which allows the House no opportunity of debating a directive when it is in draft form, even though scores of hon. Members vote against it when it is presented to the House in the form of a legislative proposal.

The Scrutiny Committee, as is seen from the fact that it has sent this directive to the House, became aware, after it had allowed the other directive to go through, that it had made a mistake. I know that the Chairman of the Scrutiny Committee was subsequently concerned at the fact that the earlier directive had gone through without being put to the House.

I am much obliged to the hon. Gentleman. That is a very fair comment, and I am glad that he has put that fact on the record.

There is clearly a big matter of principle involved, a matter of principle that is not diminished by the fact that, against the will of many of us, a precedent was created in this year's Finance Act. The issue of principle is that information secured by force of law for the purposes of taxation in this country, and only for those purposes, information that is jealously guarded from being transferred to the knowledge of other Departments of Her Majesty's Government in the United Kingdom, should not, unless there are the most compelling reasons, as well as the most watertight safeguards, be disclosed to other parties.

Tonight we had the remarkable disclosure that by a side wind, if these proposals went through in their present form, there would be set up a route of communication that does not exist in the United Kingdom itself between the two revenue-raising Departments. There is an essential difference between, on the one hand, consultation between the Revenue authorities in the different countries of the Community and, on the other, the transmission of particulars relating to an individual taxpayer or taxpaying firm.

I think that we should have little objection to the notion that the tax-raising authorities in the different countries should confer together, should compare notes, as it were, and should if necessary put forward proposals whereby their respective countries could alter their own tax systems, or other devices could be proposed, to render the tax-raising fairer and more searching.

I think that there could be no objection to that kind of collaboration between the tax authorities of the different countries in the Community. But it is a very different matter when, for that purpose, the facts about an individual taxpayer's position, about a firm's position—facts that are known in one country only because the law of that country forces it to be known for the purposes of taxation in that country—are passed for a different purpose to the corresponding authorities in other parts of the Community.

When we first debated this matter in Committee on the Finance Bill it was very much at large, but since then I have noticed, both on Report on the Bill and even more this evening, that those who have been making a case, or a faint case, for these proposals have very much narrowed the scope and intention. I was not quite clear what argument the Financial Secretary was putting forward this evening. He asserted, as he had in July, that there was mutual benefit to be obtained from this extended use of confidential information about taxpayers.

I do not think that any of us in this House would regard that in itself as a justification. I do not think that we would say that because the Revenue or the social security organisation benefited from a disclosure we would on that account be prepared to authorise it. We would probably be pretty promptly disavowed by most of our constituents if we did so.

The right hon. Gentleman went on to specify what the nature of the benefit was. I tried to follow him but found what appeared to be a contradiction. The right hon. Gentleman said that multinational or transnational firms operating in Community countries had a certain advantage in tax evasion—that is, lawfully paying less tax than they otherwise might—

The right hon. Gentleman said both.

I was speaking of the Financial Secretary's reference to an advantage in tax evasion because of the different tax systems in the different countries. The right hon. Gentleman said that because the structure of the tax was different in the different countries evasion was easier on the part of a multinational corporation. That may or may not be so. I find it easy to believe that it is so. In that case, surely the remedy is to propose to this House that the necessary alterations should be made in our Customs and Excise law so as to prevent those loopholes for evasion from existing.

I cannot see that that creates any justification for giving specific information about the circumstances of the operations in this country of a multinational in order to prevent evasion of tax in another country of the Community. If there is this facility for multinationals, I think that most of us would welcome a clause or clauses in a Finance Bill which would so alter the law, if we thought fit, in this country as to prevent that source of evasion.

I have been following the argument of the right hon. Gentleman, who is usually so precise in his use of words. I am concerned that he has been using the word "evasion" when I think that he has been intending to say "avoidance", which is the legitimate avoidance of paying taxes rather than the illegitimate one.

No, I am taking the point at this stage in terms of evasion. Let us suppose that evasion is easy in one country of the Community because its VAT is different in technical details from the VAT law in another country of the Community. That I understood to be part of the case of the Financial Secretary.

If that is so, my argument is that we should not seek to remedy it by sending the file on that firm's affairs in this country to the other country. We should seek to remedy it by the two tax authorities getting together and saying to each other, "There is this difference between our VAT systems and this is making it easy for the multinationals to pull the wool over our eyes. Why do we not propose to our respective Governments that we amend our VAT systems in these technical details so as to remedy the matter? "

Therefore, whether it be avoidance or evasion, the ordinary forms of co-operation, which we would wholly approve, between the tax authorities in the different parts of the Community are completely adequate to deal with the mischief to which the Minister has now fined down the argument for these proposals, so far as he accepts them.

But even if there is still some difficulty, it is, I submit, unjustified to give a general power of disclosure in order to deal with a very limited mischief. When we started to debate this matter, back in June, we were presented with the original directive, which is a very grandiose document and envisages an exchange of information on a wide scale for all sorts of purposes, many going far beyond the prevention of evasion or fraud.

But if what we are concerned with is a specific mischief arising in the context of multinational companies, we ought to limit the breach of confidentiality, if that is indispensable, to the mischief which we are attempting to combat.

I therefore hope that these remarks are in tune with the general prejudice which the Minister himself expressed and that this debate will result either in these proposals not being proceeded with at all or in their coming back to this House—for they must come bank to this House if they are to be proceeded with—in a much tighter and more limited form, and one which is directed towards a mischief which can be dealt with only by a breach of the taxpayer's confidentiality which we ought otherwise to be most jealous to preserve.

9.49 p.m.

As the Financial Secretary and others have reminded us, this debate is a postscript to the debate that we had in the summer on what was originally clause 62 of the Finance Bill and latterly section 77. I make no complaint of the fact that it is a postscript, although it is a pity that we could not debate this subject in the round in all its aspects.

I recognise the constraints on the Government and the time that they have had the new draft directive. However, it is a pity that we are approaching the problems of avoidance and evasion of VAT after we have dealt with the problems of the avoidance and evasion of various forms of direct taxation.

In political logic, we should have approached the problems of VAT first, since ultimately we are to be under a pressure—the commitment to harmonise our systems of VAT. For the moment VAT is to be the basis for the EEC budget. It is important that we should see the problems of harmonisation, the various steps that we should take and the technical and administrative measures that we must take here and throughout the Community if the harmonisation is to be effective and if every country is to pay its due contribution to the EEC budget.

The fortunes of politics have led us to come to this problem second. I suppose that we can derive some advantage from the experience that we had in the summer. I hope that the Financial Secretary will derive some advantage from the observations that were directed to him on that occasion and from some of the amendments that were incorporated ultimately in section 77 of the Finance Act.

I am sorry that the hon. Member for Swindon (Mr. Stoddart) is not present. He tabled a powerful amendment. I did not go all the way with him, but he deployed strongly his argument against the width of clause 62.

We have had a limited but fairly useful debate so far. I have no doubt that other hon. Members will be tempted to intervene.

I am no grudging adherent of the EEC. I do not wish to contrast my position with that of any other hon. Member, but in this type of debate we are entitled to ask two questions. First, is the Minister adequately representing British interests in Brussels on these important questions? Secondly, how will any proposals or draft proposals that the Minister brings back for us to consider be reconciled with our domestic legislation on a particular sub- ject? If they are not immediately reconcilable, how will the proposals be translated into domestic law?

In the summer, we did not have the opportunity to debate the directive. We were confronted with a piece of British embryonic domestic legislation. As the right hon. Member for Down, South (Mr. Powell) said, in the Standing Committee we had long and keen debates, in which both he and I were involved, on the scope of clause 62.

There were misgivings on both sides of the Committee—it was not a partisan division—about the width of clause 62. A leading part was played by my hon. Friend the Member for Edinburgh, Pentlands (Mr. Rifkind), who tabled a series of amendments, many of which were adopted by the Government and embodied in the subsequent subsections of clause 77. We were delighted that the Financial Secretary, who proved a little obdurate in Committee, had second thoughts about the implications of what he was asking the House to do.

We are privileged to consider a draft proposal rather than a final proposal, a draft proposal rather than British domestic legislation. With great courtesy and flexibility, the Financial Secretary has invited the views of the House. Although not many right hon. and hon. Members are taking part in the debate, I hope that we shall do our duty and convey to him with clarity and vigour what we feel are the essential principles that are to be embodied in any ultimate directive from the EEC and in any domestic legislation that he might present to the House for enactment.

Other hon. Members may share my suspicion that the Government are using an EEC directive or draft directive to further domestic objectives. I would regard that as an illegitimate use of the process. We are obliged to the Financial Secretary for giving us a chance to voice our fears and suspicions. With considerable dexterity, he referred to the possibility concerning transnational companies. I had not realised that now that we have given up referring to multinational companies the current phrase is "transnational company." I do not know whether there is any subtle distinction between the two. If there is it has certainly escaped my attention, but I leave the Financial Secretary to put me wise on that.

We respect the acumen of the right hon. Member for Battersea, North (Mr. Jay) in these matters, but we suspect that he referred to transnational companies because he knows that in that way he can play on deep-seated prejudices held by some of his right hon. and hon. Friends. We on this side will need to be convinced that there are serious problems to be faced. I am sure that the House is at one in the view that avoidance and evasion of direct or indirect taxes must be countered but we have to consider with care the methods which the Government suggest should be adopted.

I feel that the Government may have their priorities wrong. It is more important for them first to improve the tax system and to meet the legitimate objections of taxpayers. There are all too many examples of them to be found, for instance, in the annual report of the Ombudsman. Perhaps I may offer my congratulations, if that is appropriate, to the newly appointed Ombudsman. No doubt he will have as keen an eye for the imperfections of the tax gathering machine as his distinguished predecessors have had.

The Financial Secretary would have been better employed in exercising his considerable talents in reporting to the House what practical steps he is taking to remedy the defects that are disclosed by those reports and, all too often, by parliamentary Questions and debate.

There is just the faint lingering suspicion on my side of the House that the Financial Secretary has an excessive preoccupation with questions of tax avoidance and tax evasion. No doubt on this occasion the right hon. Gentleman will be able to dispel those suspicions and reassure us that we are all Europeans now, that he is deeply concerned with these questions of international comity, and that he is as concerned to see that the Revenue authorities of the other countries of the EEC are collecting their due measures of tax and that we are all contributing our due proportion to the EEC budget.

I feel entitled to put a number of specific questions from these Benches which I hope the Financial Secretary will answer. What VAT situations does the right hon. Gentleman feel these draft proposals, if translated into domestic and Community law, will meet? I do not think that it is sufficient to say that transnational companies are yell placed to avoid their due measure of tax. These measures, of course, will apply with equal rigour to the small individual trader, to the professional man and to the purely national company, as well as to the transitional company which is based not only on both sides of the Channel but perhaps on the other side of the Atlantic.

It is not enough to cloud this issue with delicate or indelicate prejudice. We are moving here from direct taxation. We can talk glibly about transfer pricing; that is not at issue today. What examples of avoidance or evasion of VAT would these proposals, if translated into domestic law, enable the Revenue authorities of this country—I do not ask what might happen in other member States—to counter more effectively than they do at the moment?

I am led to inquire—this may be a matter of legitimate interest particularly to those hon. Members who, like me, have branches of Customs and Excise in their constituencies—whether officers of Customs and Excise, if this directive is adopted and translated into domestic law, will be stationed abroad and, by contrast, will Continental Revenue officers be stationed in this country?

If Continental Revenue officers are stationed here, what kind of powers of investigation and apprehension will they have? What rights will they have concerning probing into documents and activities? That is a matter of some concern. I do not say for a moment that the integrity, the professional skill of, say, the French, German or Danish Revenue does not match that of ours. All the same, there would be some concern if Continental Revenue officers were to set up offices with far-reaching powers of investigation and interrogation in this country. That would be a novel departure—certainly one for which there is no precedent and one which I dare say the House would view with considerable reserve.

Since we are debating, in form, a proposal to amend the original proposals, the Financial Secretary ought to tell us how far the provisions of those regulations have been implemented. I make no special point about the rather specious recitals that talk about distortions of capital movements and conditions of competition. That is, I suppose, mere puff. When I remind the Financial Secretary of my first question about what precise situations these new draft proposals are directed at, he might tell us how capital movements and conditions of competition are being distorted by variations in the implementation nationally of the various systems of VAT.

I come now to article 9, which provides for consultations about the problems, situations and cases which are to give rise to the automatic exchange of information. The House will know that there are two provisions which are of intense interest and are, I believe, novel. Article 3 provides for the automatic exchange of information while article 4 provides for the spontaneous exchange of information. Article 9 refers only to article 3.

When the Financial Secretary was asked about consultations during a similar debate in the summer, he told us that there had been no consultations. I ask him now whether any consultations have taken place about the operation of article 9 and, if so, with what result. If no consultations have taken place, when does he expect them to occur? Once they have taken place, and assuming that some conclusions are reached, it seems that article 3 will be triggered off and this country will be obliged to engage in automatic exchanges of information.

The question of confidentiality has rightly exercised right hon. and hon. Gentlemen, as it exercised them in our debate during the summer. It was because of our deep concern about the breach of a long-established principle of confidentiality that my hon. Friend the Member for Edinburgh, Pentlands was moved to table two amendments which were subsequently adopted by the Government.

We felt that this was a principle of considerable importance. If there are serious and ill-considered breaches of the principle, the confidence of the tax paying public in the Revenue authorities will be seriously weakened. If it is thought that information given in confidence to the Commissioners of Customs and Excise may be made available to the Revenue authorities of other countries and may find its way back, directly and indirectly, to other Departments of State—

Indeed. I would hope—and the trend of the Financial Secretary's reply so far is to this effect—that such information would at least be confined to Government Departments. But we cannot say—and I do not wish to take a chauvinistic attitude on this matter—with what degree of confidentiality, or how strictly, these matters are observed in other EEC countries. The Financial Secretary should reassure us on that score. If he is not able to give us reassurance on this occasion, at least he should take as a clear message to Brussels the deep concern that is felt on this subject in this country.

Although the Financial Secretary said that there are limited occasions when there is an exchange of information between the Commissioners of Customs and Excise and the Commissioners of Inland Revenue, I must tell him that this comes as news to me. Perhaps I am not sufficiently well informed on this subject.

The hon. Member for West Stirlingshire (Mr. Canavan) has a deep knowledge of these matters and one respects his interventions from a sedentary position, even when not cast in full verbal form. Perhaps the Minister would say for what purposes an exchange of information is now permitted between the Commissioners of Inland Revenue and the Commissioners of Customs and Excise. As I understand the oath taken by officers who join the Inland Revenue and by members of the board, they are not entitled to pass information to their colleagues in Customs and Excise, even though they work closely with them. I hope that the Minister will reassure the House on that point.

If the Minister cannot give the House that reassurance, I hope that he will take to 13russels the clear message from this House that, above all, we demand that the confidentiality which taxpayers, both direct and indirect, have enjoyed will not be breached, advertently or inadvertently, by any proposals that may ultimately be adopted.

Does the Financial Secretary foresee the extension of the original proposals to excise duties? This is the first time that we have been asked to consider the extension to indirect taxes. In three, six or nine months' time, we may be faced with a similar situation. It is a pity that we are unable to debate these subjects in the round because, although there are fundamental differences of principle between direct and indirect taxation, nevertheless some of the same points have arisen, and will continue to do so, in our debates.

We put the Financial Secretary on notice about the points that concern us. Therefore, he will be armed and forewarned if and when he returns to Brussels. I do not suggest that we should vote against the proposals tonight, because the Financial Secretary has told us in his engaging way that he is here to listen to our comments. I hope that he will feel that our objections and questions are solidly grounded. I shall leave him to the tender mercies of his Labour colleagues, even to those of the hon. Member for West Stirlingshire.

The Government's activities in Europe have exhibited a familiar but curious sense of priorities. They are lukewarm or pragmatic—an epithet which commends itself to the Prime Minister—about the great European issues of the day. If the Minister is sufficiently encouraged by what he has heard tonight, it seems likely that the Government's main contribution to the European edifice at the end of their term of office will be to let in, possibly without strict control, Continental Revenue officers through the white cliffs of Dover, while extending the tentacles of the British Revenue to the Continent of Europe.

10.10 p.m.

I apologise for rising at this stage in the debate, but I have been provoked to intervene partly because on this occasion I agree somewhat more with the comments of the right hon. Member for Down, South (Mr. Powell) than has been the case in most of the debates in which we have participated. I intervene also because, having re-read the Commission's explanatory memorandum, I find that there are two or three questions that I should like to ask.

In its explanatory memorandum the Commission gives a number of reasons for adopting the directive. The first is that the information received from the member States shows that there is much illegal practice involving VAT in international trade, including fraudulent importation and the use of false export invoices. I thought my right hon. Friend said that if there was that international trade it was caught under the provisions of the Naples convention, in which case the first argument used by the Commission would appear to fall.

The second reason adduced by the Commission relates to the provisions of the sixth VAT directive dealing with the
"location of the supply of services … and tax deduction for transactions effected abroad".
If transactions are effected abroad on which VAT is payable, presumably the Naples convention to which my right hon. Friend referred would also apply. If that is so, it appears that the first two arguments adduced by the Commission are falsely based. I should like to be reassured by my right hon. Friend.

The item on the second page of the memorandum may be more substantive. The House will require much more evidence of the validity of what is said there before it will be minded to give its approval to the proposal. We need to have more evidence of the losses from VAT, either because of fraud or because of non-collection, and the impact that that will have on the Community budget.

If the other member States are keen to have this measure adopted they should make available to my right hon. Friend, and therefore to the House, the information on which they base these general assertions. We as a House, or even as a Scrutiny Committee, have not yet had that evidence, and we need it.

The third approach in the explanatory memorandum suggests that we shall be able to obtain more accurate information on taxes, on incomes and on profits by getting information on VAT. That is asserted, but from what my right hon. Friend has said there seems little evidence that in the United Kingdom information about VAT is or could be of special value in assessments for direct taxation.

The Commission states in the final paragraph of the explanatory memorandum that an amendment to the directive is clearly needed, but it has not established the clarity of the need. If my right hon. Friend returns to Brussels, I ask him to ask the Commission and his colleagues from the other member States who are apparently keen on the directive to ensure that evidence is provided so that the House can understand the reasons for what is proposed. There may be good reasons for it, but what is necessary is not an assertion, as in the Commission document, which seems to be rather dubiously based and not fleshed out, but clear evidence that this is an important contribution to the weapons at the disposal of the tax authorities in the countries concerned.

10.13 p.m.

My hon. Friend the Member for Farnworth (Mr. Roper) dealt with a number of matters which merit fuller treatment.

My hon. Friend questioned the need for these changes since they are not required by the United Kingdom, as I indicated in my earlier remarks. It is not clear to me why the other countries might require the powers arising from the directive. Surely fraudulent importation would be covered by the Naples convention. I would have thought that applied to tax deductions for transactions effected abroad. I do not have any further information and look forward to hearing why the other member countries consider the directive to be so important, as they have stated frequently. Indeed, their views gave rise to the directive.

My right hon. Friend the Member for Battersea, North (Mr. Jay) asked whether the directive would apply just to multinationals or any taxpayer. When I was talking about multinationals I thought that I had made clear, but obviously I had not, that I was referring to points made on this year's Finance Bill. I that the need for action to deal with the multinationals was important when we discussed that Bill, and I believe it to be even more important now.

I understand the point made by the right hon. Member for Down, South (Mr. Powell) to be that he thought that eva- sion, where it arises, should be countered by means of amendments to our own domestic legislation. I am talking not about value added tax—for the reasons that I have given, I do not think that it is relevant in this context—but about corporation tax and income tax. I believe that the main problem, and one of very great importance—this is not a red herring or an attempt to attract votes from those of my hon. Friends who might otherwise wish to withhold them—is that the multinational and transnational companies, as they grow in importance, size and activity, are able to move funds from country to country. This is a problem with which we have to deal. I should be prepared to deal with it on any basis, whether at a European level, an international level, or by means of any forum which could help.

It so happens that one way in which this subject came before us was through the Community, and I welcomed it because I felt that it gave us an opportunity to deal with the problem of evasion by multinationals. It is not sufficient to say that all we need to do is to bring up amendments to our own laws. We need information from other countries.

In this respect I refer to a Question from my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) which I answered recently. One of the major problems that we have is that, as the operations of so many of these companies are extensive and deal with movements of goods and money from country to country, the prices at which those goods are sold can be determined by the companies themselves. Given sufficient determination, funds can pass from country to country, and taxation liabilities of companies can thereby be shifted to whichever country the companies may choose. This difficulty cannot be overcome simply by looking at the tax position in one country alone.

What we have done has been valuable but it has been limited. It is only when countries co-operate to ensure that transfer pricing is done in a manner which reflects the opportunities of such companies to move their funds that countries can equip themselves with the right degree of control over the tax affairs of these companies.

I was not disagreeing with that at all, but the fact presumably remains that legally these provisions do not apply only to multinational companies.

But this is what it is all about. An individual operating a company would be in the same position as a transnational company, but the normal individual does not create these problems of transfer pricing, in the main. We are talking of companies with substantial taxation liability, and I believe that this is an important way of dealing with them.

My right hon. Friend the Member for Battersea, North and the right hon. Member for Down, South agreed that changes would be necessary before they would be satisfied. I suspect that a large number would be needed in order to satisfy me! It was suggested that what we really need are substantial changes, and that these should be brought back to this House. This is not a matter for me, although I am sympathetic to any suggestion of that sort. The present form of the directive is certainly not one that I would wish to see enacted.

The right hon. Member for Down, South asked about the extent of communication between the Inland Revenue and the Customs and Excise. I mentioned that there are some limited forms of interchange of information between the Customs and Excise and the Inland Revenue. One of the forms of interchange, and the most interesting—that is why I mentioned it—is the Leeds experiment, whereby information concerning traders' accounts is exchanged between the Customs and Excise, responsible for the collection of value added tax, and the Inland Revenue. However, under the Finance Act 1972, the Inland Revenue and the Customs and Excise also have the right to exchange information between themselves where fraud is involved. That has been the case now for six years.

The hon. and learned Member for Dover and Deal (Mr. Rees) asked me to ensure that there would be adequate representation of United Kingdom interests in Brussels. It is for the House rather than for me to judge on that. I feel this to be an important matter and I shall seek to represent our interests as best I can.

The hon. and learned Gentleman suggested that it was more important to deal with the problems of the tax system as it operates now than with some of these European matters. It was not for me to bring forward such matters. The draft directive initiated this debate, via the Scrutiny Committee, and I am responding to it. I should be happy to discuss some of the problems of the tax system. Of course, it will not be long before we have our annual bout of enjoyable activities in Committee on the Finance Bill. I am sure that we shall be able to continue these discussions in that Committee.

The hon. and learned Gentleman asked what VAT problems the draft directive would meet. I think that he was partly answered by my hon. Friend the Member for Farnworth and by my comments on that matter.

I was asked specifically by the hon. and learned Gentleman about Customs and Excise officers being stationed abroad and their counterparts from other countries coming in this country. United Kingdom officers will not be stationed abroad, but visits can and are likely to take place where appropriate, when investigation is required.

The hon. and learned Gentleman asked whether consultations would take place under article 9. The other countries are still in the preparatory stages of implementation of the directive. Therefore, I have nothing more to add to what I said in the Finance Bill debates, except that such consultations will probably take place before the end of this year.

As the right hon. Gentleman said that consultations will take place, will he take the House into his confidence and say whether the cases which he will be representing to the Commission will be the subject of the automatic exchange of information under article 3? Presumably he has done a bit of departmental thinking on the subject. Will he take the House into his confidence, so that we may have some idea of the scope of information which is likely to be exchanged automatically regarding taxpayers' affairs?

I expect that there will be discussions about these very matters. Therefore, it would be futile for me to anticipate the outcome of such discussions. I have indicated where my interests and the interests of Community countries lie regarding disclosure of information relevant to transfer pricing which might not otherwise come to light. That aspect particularly interests me. I hope for further success building on what we have achieved within our own domestic legislation and practice.

The hon. and learned Gentleman asked about the extension of the main directive to excise duties. There are no proposals for such an extension. If there were to be any such extension proposed, the House would be informed immediately.

I think that we have had a useful debate. I fully share the anxieties which have been expressed. I have explained that I am sympathetic to the ideas behind the amendment moved by my right hon. Friend the Member for Battersea, North, and I hope that he will accept the assurances which I have given.

In the hope and belief that the Financial Secretary is doing and will do his best to meet the points which have been made in the debate, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question put and agreed to.


That this House takes note of Commission Document No. R/1123/78 on Mutual Assistance in the Field of Direct Taxation.