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Unitary Taxation

Volume 164: debated on Monday 18 December 1989

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Motion made, and Question proposed, That this House do now adjourn.— [Mr. Kenneth Carlisle.]

1.44 am

I hope that my hon. Friend the Financial Secretary will not take it amiss if I welcome him to the debate as the seventh in a distinguished line of Financial Secretaries who have dealt with this problem for 14 years. It has been the longest-running issue that Parliament has seen for a long time. This is the third Adjournment debate in which I have had the opportunity to raise the issue, and that in itself speaks of the longevity of the issue.

Because of this history, there is no need to spend any time in describing what the problem is over unitary tax. Its application has been internationally condemned as an iniquitous form of corporate taxation. It has been condemned by Australia, Canada, Japan, Switzerland, the United States, the OECD, the EEC, the US Administration and Her Majesty's Government. In the House, it is very much an all-party issue, as I am sure you will remember, Mr. Deputy Speaker. It has been condemned by all parties. That condemnation has been refreshed today by the tabling of a new early-day motion, which has already been signed by 150 hon. Members. I think that more will sign in the coming weeks. We have applied our minds to it over the years, but it has yet to be solved.

This is a timely moment to have the debate because the US Administration and the British Government are about to start a major review of the progress on the issue. If the review is only about progress, it may be only a short meeting, but I hope that it will include discussion of future action, and I hope that my hon. Friend the Financial Secretary will participate in the review. We need to assess how we can take this matter forward, and nail it once and for all.

Whatever may be said about what has happened in California, it still uses unitary taxation on a worldwide basis. It has introduced a limited form of legislation that allows companies, on the payment of a fee, to elect to be taxed not on a worldwide basis, but on the basis of a water's edge method. Electing to pay the fee for something that is wrong, and has been condemned internationally, is nothing less than disgraceful. That is the morality of Dick Turpin, the famous highwayman, who said, "Give me your money, and then you will be allowed to proceed." That is what has happened in California. Therefore, I am glad that the British Government and the United States Administration have firmly recorded their opposition to the legislation in California because it does not deal with the problem and kill it off once and for all.

There is one glimmer on the horizon. New proposed legislation in California would abolish the election fee and ease some of the other concerns of British companies operating in California. If the legislation is to have any chance of moving forward, it will need the active support of the United Kingdom Government, who must lean on the United States Administration in Washington, to encourage and help them to ensure that the legislation does what it must to be effective.

British businesses are concerned about the legislation, and they do not like, and have to deal with, such factors as the length of the election period, which they believe is still too long. The details of information—the spreadsheet that they have to provide to the state of California—mean an enormous amount of administrative, non-productive bureaucratic work for the companies, which should not have to do it. They also do not like the ability of the state of California arbitrarily to deny them access to the water's edge solution. They do not think that that is right.

At the moment, the legislation is flawed, and British business operating in the United States, with important investments for our companies, do not consider that the problem has been solved. The Californian legislation in 1986 was no solution, and we have proof of this.

A recent survey carried out by the Unitary Tax Campaign, which has led this issue and been the driving force behind the move for reform, had 51 replies to a survey of British businesses operating in California. Of the 51, 42 stated that unitary tax was extremely onerous. Yet only six were prepared to opt out of unitary taxation. That was because current legislation was much too risky. That result—six out of 51—shows a complete lack of confidence in what California has put forward as a so-called solution. It shows that the so-called solution to current Californian law is nothing less than a sham, and we should not be afraid to say so.

Why are companies not electing to get out of worldwide reporting and to move towards a water's edge solution? I think that it is principally because they are opposed in principle in unitary tax on a worldwide basis. They believe, I think rightly, that if they support current legislation, they will support legislation that they think is wrong.

Companies object to the fee. It cannot be right to pay a fee to do something that is entirely normal in every other civilised industrial country. Companies do not like it and they will not elect because of the uncertainties. California's record as a taxing authority does not inspire them with any great confidence.

Over the years, we have returned to this issue time and time again. The campaign to try to get it resolved has been led by Great Britain through the CBI and, above all, by the Unitary Tax Campaign, a grouping of leading companies in Britain that has lobbied hard and long in America to resolve the issue. It is time that we told our friends in Washington and Sacremento that 14 years is too long and that it is time that the issure was resolved. Let us tell them that the partience of the House is running out, as California refuses stubbornly to resolve it. After 14 years it is time for us to be tough. I hope that my hon. Friend the Financial Secretary will be able to tell the House that the Government are still much concerned about the issue, want to see it resolved and are prepared to introduce tough action to see that that happens.

We have effective leverage in our hands, called section 812 of the Income and Corporation Taxes Act 1988. I hope that at least we shall hear tonight that that section will remain firmly on the statute book until unitary tax on a worldwide basis is abolished in America once and for all. It is important that section 812 remains, to show the Americans that we are determined to resolve the issue. When the tax is abolished, the section can be removed from the statute book, because it will have done its job.

I hope that my hon. Friend the Minister will be able to tell us that he will participate in ministerial meetings to show the Americans that we mean business. The House has been considering this issue for too long. Clearly 14 years is too long. I hope that this is the last Adjournment debate that I shall ever have to have on the matter, and that we shall see the abolition of unitary tax, which has been so damaging to so many British companies over the years.

1.53 am

This is a timely debate on an extremely important matter. The entire House will be grateful to the hon. Member for Surrey, North-West (Mr. Grylls) for having raised it this evening. I do not wish to detain the House for long, because the Financial Secretary's reply is the important part of the debate and I look forward to hearing it. I want, however, to underscore a number of matters that have been raised by the hon. Member for Surrey, North-West.

First, California's unitary tax regime as applied to non-American companies is no more acceptable to the Opposition than it is to the Government. It is unacceptable that it has continued for 14 years. The issue is not one for the United Kingdom alone. American's other friends, traders, investors and partners all have a similar interest in reaching a solution, but perhaps it is for the Government to put themselves at the head of organising concerned representations on a international basis.

My understanding is that the American Administration are committed to limiting unitary taxation to the water's edge by federal legislation, if necessary. I do not regard the present fee-paying option as anything like a fair or satisfactory settlement. It certainly does not meet the Administration's stated objectives. It smacks of protection money and nothing more.

In 1985, the British Government issued the statement:
"In the light of the President's statement, the Government will enter into negotiations with the Administration to amend the UK-US double taxation convention so as to prevent the application of the unitary method of taxation to UK companies."
I understand that that statement has yet to be given effect. It should be, and soon.

During debates on the 1985 Finance Bill, there was discussion about whether new clause 27 should be inserted. It was, with all-party support. My hon. Friend the Member for Sedgefield (Mr. Blair) set out the Opposition's position, and it remains the same. I refer to what is now section 812 of the Income and Corporation Taxes Act 1988.

The present unitary tax arrangements in California amount to no more than a sophisticated and populist protectionist device. I accept, but regret, the necessity of inserting what was new clause 27 into the 1985 Bill. It was done not because we thought it right for its own sake, but as a response to a very unfair form of taxation being carried out by a country with which we otherwise have close and friendly relationships.

Although now the law of the land, the provisions of that new clause have not been applied. I must make it clear that an incoming Labour Government would reserve their right to apply the clause, whether or not the Government do so. If it is on the statute book, it can be applied. When the Financial Secretary responds, I hope that he will agree to send a message to our friends across the Atlantic that is slightly firmer than just restating the fact that unitary taxation is not cricket. He should do a little more than that.

1.57 am

I congratulate my hon. Friend the Member for Surrey, North-West (Mr. Grylls) on securing his third Adjournment debate on the important subject of worldwide unitary taxation and also on the lucid and forceful way in which he expressed his opposition to that form of taxation.

Worldwide unitary taxation is very much a subject that my hon. Friend has made his own. He has campaigned tirelessly on both sides of the Atlantic for some years and it is a tribute to him that he has united both sides of the House in pursuit of his campaign. That is shown both by the early-day motion, which has about 150 signatures from hon. Members of all parties, opposing worldwide unitary taxation, and by the helpful and constructive speech by the hon. Member for Newcastle upon Tyne, East (Mr. Brown) on behalf of the Opposition. I am grateful for the hon. Gentleman's contribution, which strengthens the Government's position in negotiating on this issue.

I pay tribute to the Unitary Tax Campaign, especially its chairman Peter Welch. Since it was founded in 1978, it has dedicated itself solely to the elimination of worldwide unitary tax. Its members include a substantial majority of the United Kingdom corporate direct investors in the United States.

I must straight away reaffirm both the Government's opposition to worldwide unitary tax and their support for the aims and objectives of the Unitary Tax Campaign and other bodies which have campaigned against worldwide unitary tax. The British Government are opposed to worldwide unitary taxation because it is contrary to accepted international tax principles, manifestly unfair and damaging to international investment. It is contrary to the accepted international principles, which indicate that each country should levy tax only in respect of profits which arise in that country's jurisdiction. It is manifestly unfair, since it can result in international companies paying tax to more than one Administration in respect of the same profits—and even paying taxes in a country where they are making losses simply because they are making profits elsewhere, in another country. It is damaging because it is bound to discourage the flow of international investment, which is mutually beneficial to host and source countries, as well as undermining normal relations between tax authorities.

That is why the British Government have pursued their opposition to worldwide unitary taxation as vigorously as possible through all appropriate channels—directly to the Californian state authorities, jointly with the United States Federal Government whose support in this matter we greatly welcome; in conjunction with our European Community partners; in supporting British companies in their court actions; and in taking legislative power to strengthen our bargaining position. Those pressures and the sustained work of the Unitary Tax Campaign have not been without effect. Barclays won a notable victory when the Californian Superior Court ruled its worldwide unitary taxation unconstitutional. Unfortunately, however, the United States legal mills grind slow and the final outcome is far from sure.

Another success of a kind is that California has so far taken two steps to meet the widespread concerns of international investors. First, in 1986 it passed legislation to allow companies to elect not to be taxed on a worldwide unitary basis, but companies which so elected had to pay fees and were committed to the election for a period of years and the Californian authorities still retained the right to impose worldwide unitary tax in certain circumstances —for example, if they found any of the voluminous data that they require unsatisfactory. Secondly, in 1988 California passed legislation which reduced the election period to five years and made certain other rules more workable.

Despite those changes, the Californian tax regime remains profoundly unsatisfactory. It is not acceptable that British companies should have to pay a fee to elect to be taxed on the normal "water's edge" basis. Nor is it acceptable that after paying such a fee they may still be deprived of that right if they cannot comply to the state's satisfaction with its onerous requirements.

Consequently, we have kept up the pressure and in the last year alone the Government have supported British companies in court with amicus briefs, and played a prominent part in the Community's demarche on unitary tax to the US Treasury. That elicited a potentially useful response—that the state's use of unitary tax
"remains a serious concern"
and
"may constitute an impermissible interference in the conduct of the nation's foreign affairs."
Finally, we sent a senior member of our Washington embassy to accompany the British delegation to California in connection with legislation being prepared there last summer.

Last March, my predecessor announced that we were prepared to defer initiating action under the potentially retaliatory legislation that the House passed in 1985, which would deny tax credits relating to dividends paid by US subsidiaries of companies with headquarters in states with unitary taxation. We did this in recognition of the progress that had been made towards resolving the unitary tax issue. We further made it clear that if it became necessary to take such action after the end of December 1989 it would not apply to dividends paid on or before that date.

My hon. Friend asked for confirmation that the Government intended to retain the potentially retaliatory legislation that the House passed in 1985. I gladly state, quite unequivocally, that at present there is no question of the repeal of that legislation.

Earlier this year my right hon. Friend who is now Chief Secretary to the Treasury proposed that, in the light of subsequent progress, we should review the situation jointly with the United States Treasury later this year. United Kingdom officials have, in consultation with the Unitary Tax Campaign and other representative bodies, initiated that review.

The survey information to which my hon. Friend referred will be of great value during the review. The question of any further undertaking not to act under the 1985 legislation will be considered as part of the review. Hon. Members may also rest assured that the anxieties that they have expressed today will be brought to the attention of the United States Government. I shall forward to the US Government the report of today's debate.

A couple of years ago, the Governor of California opened a trade office in London to attract British business to California. The United Kingdom already has substantial investment in California and there is every sign that it wishes to continue and to increase such investment. I therefore urge the California state authorities to think again if they want the flow of investment from Britain to California to continue. I urge them to abolish completely the election fee and substantially to reduce the election period and the compliance burden of foreign companies so that British industry will once again be able to take its full part in investing in California, to the benefit of all concerned.

Question put and agreed to.

Adjourned accordingly at six minutes past Two o'clock.