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Finance Bill

More than 20 countries have adopted controlled foreign company legislation including nine European Union member states. The CFC rules stop UK companies avoiding UK tax by diverting profits to low-taxed foreign subsidiaries. Some groups have artificially provided their subsidiaries with certain types of income. Others have arranged for subsidiaries to have an apparently high rate of tax to be repaid to a different group member. Thus the company appears to have paid a high level of tax when in reality it has done so such thing. All such devices are designed to distort the application of the lower-level-of-taxation test. The clause amends the operation of the test to prevent artificial distortions. It contains a timing rule to prevent CFCs manipulating their accounting periods to defer the application of this legislation. The hon. Member for West Suffolk (Mr. Spring) raised the case of Cadbury Schweppes. We do not believe that the operation of our CFC rules breaches the European treaty. As in other aspects of the corporation tax system, we will strongly defend our system against challenges under EU law. I trust that we would have support from the Opposition for so doing. The Cadbury Schweppes case has not yet even been heard by the European Court of Justice. It is pointless to speculate now about the outcome or the potential costs.