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Taxation: Businesses

Volume 702: debated on Thursday 5 June 2008

asked Her Majesty’s Government:

What steps they are taking to create a more beneficial tax environment for businesses with foreign income.

My Lords, the Government are committed to ensuring that the UK tax system is internationally competitive. We are reviewing the taxation of foreign profits closely with business in considering possible reform. UK businesses benefit from one of the largest double tax treaty networks in the world. The recent cut in the UK’s corporation rate supports the UK’s beneficial position. The Government recently established a forum for multinational business to discuss the long-term challenges facing the UK tax system.

My Lords, I thank the Minister for that reassuring reply. Why have the Government embarked on this overhaul of multinational company taxation when they must have known that it might cause an exodus of companies to more tax-friendly countries? Is this another example of the Chancellor’s somewhat faulty judgment?

My Lords, the Government embarked on the process because business pressed them to review aspects of business taxation. We set out our consultation document last year and we will continue those discussions. We have not made up our minds about taxation of foreign profits at present. We are clear on making sure that our taxation remains competitive and the House will be all too well aware of the fact that our corporation tax rate is the lowest in the G7.

My Lords, the Minister has again trotted out the comparison with G7 rates of tax, but we know, and I am sure he knows, that on all other comparisons—the OECD, the EU and so on—we compare very badly. When will the Government accept that, as the CBI has pointed out, as long as the UK’s tax system is competitively benchmarked only against the G7, the UK will fail to be truly competitive?

My Lords, if the Opposition are dropping into the facile position of comparing the UK economy with, for example, Ireland, which has been much in the press recently, the Government and I can cite only the G7 countries, because those are the significant economies and Ireland is very different. It has a much, much lower corporation rate, but it has a different tax system and an entirely different economy from that of the United Kingdom, so it is not a fair comparator. What is clear is that our take is below the overall average OECD corporation tax rate, so the figures that I am quoting are relevant to a significant economy such as the United Kingdom’s.

My Lords, does the Minister agree that the remit of the forum to which he just referred, which was set up to look at long-term taxation for foreign earnings, has been changed to dig the Government out of the hole into which they have fallen by putting out a consultation document that could have serious implications for the headquartering of multinational companies based in the UK? Will he tell his colleagues in the Treasury that, before it issues consultation documents that imply government support, it should informally discuss the likely consequences with those who are most affected, rather than being forced into a public humiliating back-down, as has happened in this case and in the case of the non-doms, when the real consequences of what it proposed come into the public domain?

My Lords, as I have indicated, the Treasury produced its document in relationship to business pressure and indicated that it was a consultation document, as the noble Lord has fairly said, on the long term. A considerable range of issues will therefore be raised. The Government strengthened the position by bringing together the multinational business forum, of which, I might add, the director of the CBI is also a member, to consider these issues in the round. It is a consultation process; the Government are not committed to a particular position. I accept that we have said that we intend to ensure that any changes will be neutral in terms of revenue.

My Lords, will the Minister comment on the statement made by one of the leaders in the private equity sector that his cleaner pays more tax than he does?

My Lords, private equity is a specific-dimension issue at this point and, in the case that my noble friend has identified, relates rather more to personal taxation, when the question and all the issues that we are discussing in consultation are about business taxation. He has, however, highlighted a point that caused great concern across the nation when it was revealed in the way it was last year.

My Lords, I fear that the Minister deceives himself when he draws the comparison that he did with Ireland. He leaves out of the account the fact that Ireland is so close to us that we share a land frontier with it. It also shares the same business and legal structures as ours. There is plenty of evidence that firms are attracted to other places, particularly when we bear in mind that financial firms can transfer easily to them. Ireland is not the only place in the world with corporation tax rates at or just above 10 per cent. The Government will have to look again at this very carefully before our economy suffers.

My Lords, the noble Lord is right that there are other countries, apart from Ireland. The average rate of those that have recently joined the European Community is considerably lower than the British rate, but we do not expect large numbers of multinationals to relocate to places such as Sofia or Bucharest because there are other factors. When one looks at where business locates, business taxation is only about the sixth consideration. There are many other reasons why headquarters are established in a particular country. That is why, as the noble Lord has indicated, Ireland has enjoyed a signal advantage in taxation over many years. There is no flood of companies eager to locate from London to Dublin.

My Lords, is the Minister aware that, much as the Republic of Ireland has something in common with the United Kingdom, none the less it has a different currency and its economy now has great problems? Attractive as lower corporation tax is, Ireland now finds it very difficult to export to the United States and the United Kingdom. The euro is damaging its exports.

My Lords, the noble Lord is very knowledgeable about Irish matters. I raise the issue only because that has been the current illustration in the press; that is, the so-called potential flight of companies and their headquarters from the UK to Ireland. The noble Lord is right: the Irish economy is vastly different from the UK’s economy. I mentioned the issue with regard to our treaties on taxation, which are of great importance to the security of business when it is dealing with other countries. Those bilateral agreements are as extensive in the United Kingdom as in any country in the world.