AND
COMMISSIONER OF INLAND REVENUE
>
(Respondent)
<
n P, Kapi JA, Casey JA
Date and Place of hearinsup>th June 1999, Hon, Honiara
Date of delivery of Judgment: 8th June 1999.
Delivered by the Chief Justice on 8 June 1999
DRAFT JUDG JUDGMENT OF THE COURT
This appeal is brought by the appellant taxpayer from orders mers made by Palmer
J. in the High Court dismissing the taxpayer�s
appeal against assessments to
tax for the years 1994 and 1995, upholding the assessments and ordering the
taxpayer to
pay the respondent Commissioner�s costs.
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By his assessment for the year ended 31 December 1994, the Commissionesioner
assessed the taxpayer to income tax in the
sum of $2,323,053.20 on an income
chargeable to tax of $6,780,152.00. In arriving at that amount of chargeable
income,
the Commissioner disallowed a deduction of $3,204,964.00 being the
amount of dividends paid by the taxpayer in that year to
Commonwealth
Development Corporation (�CDC�), a shareholder in the taxpayer.
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The Commissioner also disallowed a deduction of $822,144.00, being the
amount of dividends paid to the Investment Corporation
of the Solomon
Islands (�ICSI�), another shareholder in the taxpayer.
The Commissioner assessed the taxpayer to incax for the year ended 31
31
December 1995 in the sum of $9,199,771.70 on
an income chargeable to tax of
$26,285,062.00. In arriving at that amount of chargeable income, the
Commissioner disallowed
a deduction of $2,204,964.00 being the amount of
dividends paid by the taxpayer in that year to CDC and disallowed a further
deduction of $959,168.00 being the amount of dividends paid by the taxpayer
to ICSI in that year.
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The taxpayer�s objection to the assessments was disallowed by the
Co Commissioner. The taxpayer appealed to the High
Court, contending that, on
the true interpretation of s.14 (2)(m) of the Income Tax Act, Cap. 123 (�the
Act�) the amount of the dividends so paid were deductible.
It is common ground between the parties that the amounts of dividends paid
t to CDC and ICSI by the taxpayer are exempt
from tax. The CDC exemption
arises from article 6 (4) of the United Kingdom/Solomon Islands Double
Taxation Arrangement
(�the boil�) to which legal effect was given by an
order made pursuant to s.39 (1) of the Act. The ICSI exemption arises from
s.12 (1) of the Act read in conjunction with para. 35 of the First Schedule
to the Act.
The critical statutory provisions
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The critical provisions of the Act are:
�14(2) Without prejudice to the operation of sub-section (1), in computing
the gains or profits of any person for any
year chargeable to tax under
section 3(a), the following amounts shall be deducted-
(m) the a of any dividends paid in a in any year by a company resident in
Solomon Islands from which tax has been deducted
in accordance with section
33.�
�) Subject to section 33, tax upon the chargeable income, ote, other than
income specified in section 34 (3), of a person
other than an individual or
a company not incorporated in Solomon Islands, shall for any year be charged
at the rate
of thirty-five cents for every dollar of such chargeable
income.�
�33. (1) To the extent that any dividend is not exempt empt from tax, every
company resident in Solomon Islands shall
deduct from the amount of any
dividend paid to any shareholder out of any profits, whether or not charged
to tax under
section 3, tax at the rate of twenty cents in the dollar for
persons who are resident in Solomon Islands and at the rate prescribed
in
section 32 (1) for persons who are not resident in Solomon Islands.�
The Judgment of Palmer J
Palmer J. rejected the taxpayer�s argument that the words in s.14(2)(m) �the
amount of any dividends paid �� from which
tax has been deducted in
accordance with section 33� include dividends on which nil or zero tax has
been paid. Palmer
J considered that the words were capable of one meaning
only, namely that tax is either deductible or it is not.
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His Lordshinted out that article 6 (4) of the DTA was concerned only only
with the exemption from tax of dividends paid
by a company resident in the
Solomon Islands [the taxpayer] to a resident of the United Kingdom [CDC] who
is subject
to tax in the United Kingdom. Article 6 (4) says nothing about
deductions allowable in respect of the gains or profits of the
taxpayer as a
company resident in the Solomon Islands. So much appears from Article 6 (4)
which provides-
�Dividends
paid by a company which is a resident of the Solomon Islands to a resident
of the United Kingdom in respect
thereof shall be exempt from any tax in
Solomon Islands which is chargeable on dividends in addition to the tax
chargeable
in respect of the profits or income of the company.�
His Lordship noted that the purpose 14 (2) (m), in providing fong for
deduction of the amount of the dividends to which
it refers, is to avoid a
situation in which the relevant income is subject to tax twice, both in the
hands of the company
paying the dividend and the recipient. But for s.
14(2)(m), the paying company would pay tax on its gains or profits and the
shareholder receiving the dividend would pay tax on the dividend paid from
the payer�s gains or profits on which tax
was paid.
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The appeal to this Court
It is conceded by counsel for the taxpayer that, if s. 14(. 14(2)(m) is to be
interpreted as a matter of ordinary language,
there would only be available
to the taxpayer a deduction for the amount of dividends paid from which tax
has actually
been deducted in accordance with s.33(1). Counsel for the
taxpayer submits, however, that other considerations require that
s.
14(2)(m) should be interpreted so that the concluding words of the provision
read �from which tax has been deducted
or is deductible or is exempt from
deduction in accordance with s.33�.
The first matter on which the taxpayer relies to bring about this result is
the exemption of dividends paid by a Solomon
Islands company to a United
Kingdom resident pursuant to Article 6(4) of the DTA. The fact that such
dividends as those
paid to CDC were exempt from tax was well known when ss.
14(2)(m) and 33(1) were introduced into the Act by Act No. 17 of 1979.
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The second matter is the memorandum of agreement (�the MOA�) of 13 Dece December
1979 between the Government of the Solomon
Islands and CDC. Clause 5(1)(a)
and (b) of the MOA provided-
�5. FUTURE MATTERS
<
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(1) The Government confirms that it is its intentitention-
(a) to ensure that where CDC has an equity shareholding in a Solomon Islands
company and a deduction in respect of dividends
paid by that company from
its chargeable income results in a tax loss (or the increase of an existing
tax loss), that
tax loss shall be treated like any other tax loss and in
particular shall not be limited as to the period for which it may
be carried
forward;
(b) to ensure that the total rate of any Solomon Islands tax deducted from
and/or charged on dividends payable to non-resident
persons (including
corporations) shall not exceed the rate of tax payable on the chargeable
income of a Solomon Islands
company and that such dividends shall be
deductible from the chargeable income of the paying company.�
The MOA
The provisions of cl.5(1)(a) and (b) of the MOA form a cal part of the
taxpataxpayer�s argument. The taxpayer submits
that by the clause the Solomon
Islands Government under-took that a company resident in Solomon Islands in
which CDC
had a shareholding would be entitled to a deduction for dividends
paid to CDC notwithstanding that Article 6(4) of the DTA
provided that
dividends shall be exempt from tax in Solomon Islands. There is an initial
difficulty in treating a confirmation
of intention as the equivalent of an
undertaking. A confirmation of intention may in some situations leave the
party
at liberty to change its intention.
But we put this problem to one side because we do not consider clause 5 goes
as far as the taxpayer submits. When cl.5
(1) (a) and (b) are read together,
it does not appear that they necessarily contemplate that dividends payable
to CDC
which are exempt from tax will be deductible. Paragraph (b) deals
with the relative rate of tax levied on dividends payable
to non-residents
and the rate of tax payable on the chargeable income of a Solomon Islands
company. It also deals with
the deductibility of �such dividends� from the
chargeable income of the company. But �such dividends� are dividends from
which tax is deducted or on which tax is chargeable.
Paragraph (a) deals with the availability of tax loin a Solomon Islands
company as a result of the deduction in respect
of dividends paid by the
company but it does not require the general allowance of a deduction
for every dividend so paid. Clause 5 does not, accordingly, provide a
sufficient
basis for the interpretation proposed by the taxpayer.
The Second reading speech
e Minister said-
�When a cy makes a profit, and its dits directors recommend a dividend be
paid to the shareholders, the company will deduct
a withholding tax of 20%
from dividends paid to locally resident shareholders, and 35% ..... from
dividends to non-residents
......... The company that paid out the dividends
will pay over the with-holding tax to the Income Tax Division, together with
company tax at the new rate of 35% .... on the profits it has not
distributed as dividends.�
The Minister�s remarks confirm the proposition which, in any event, is to be
gathered from the provisions of ss. 14(2)(m)
and 33(1) that they are
directed to the avoidance of double taxation on company gains or profits as
between a company
and its shareholders, rather the avoidance of double
taxation as between Solomon Islands and other jurisdictions. It is
significant that the Minister�s remarks relating to the two provisions make
no reference to double taxation in the latter
sense. The Minister was simply
concerned to make the point that the new provisions introduced a general
system of tax
on undistributed profits of companies.
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No doubt the Minister was aware of the progress of the negotiations which
led to the execution of the MOA on 13 December
1979 when the Bill was
debated in Parliament between 15 November - 29 November 1979. Nevertheless,
the fact remains that
his remarks were directed to double taxation in the
sense already explained. That system would have some consequences for the
application of double taxation agreements and in a number of respects it
seems to have given effect to or made provision
which conformed to the MOA.
But that is nothing in the second reading speech to indicate an intention to
attribute to
cl.5 of the MOA the effect argued for by the taxpayer or to
legislate to that effect.
The consequencethe ordinary interpretation
Having regard tt we have already said, the ordinary interpretation of
the critical provisions does not frustrate
the statutory objects. True it is
that, on that interpretation, a shareholder resident in the United Kingdom
of a Solomon
Islands company is no better off than a foreign shareholder
resident not resident in the United Kingdom in terms of the total
tax
(company tax plus withholding tax) paid out of the company�s gains or
profits. On the other hand, the resident in
the United Kingdom is better off
to the extent that no Solomon Islands tax is payable on his dividend. In any
event,
we should mention that there is no strong ground for thinking that
CDC was to be given particularly favourable tax treatment.
The tax �holiday�
it had enjoyed in its development years had come to an end.
Whether the country of residence levies a tax on the dividend is f is for it to
decide. What tax is to be imposed on the
Solomon Islands company�s income is
a matter for decision by Solomon Islands as the country of the source of
that income,
subject to the operation of the DTA. This allocation of tax
responsibility between the country of residence and the country
of source is
a logical allocation.
Interpretation of s. 14(2)(m)
The matters on which the taxpayer relies do not justify a fy a departure from the
ordinary meaning of the words used in s.14(2)(m).
In any event, it would do
very great violence to those words to read the words �from which tax has
been deducted� as
embracing a case in which �nil� tax has been paid. The
authorities on which the taxpayer relied for this argument are very
far
removed from the present case.
disposing of the taxpayers principal argument, we should stld state that the
language of s.14(2)(m), when read with s.33
(1), is so strong that, even if
the taxpayer had made good its interpretation of cl.5 of the MOA, we would
have difficulty
in departing from the ordinary meaning of the statutory
provision. That meaning is reinforced by s.33 (1) particularly the
opening
words-
�Toextent that any dividend isnd is not exempt from tax ...�
These words make it clear beyond any question that the rege regime introduced by
the two provisions deals with non-exempt dividends.
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The ordinary meaning of the words in s.1m) would confine its operatperation
to dividends paid from which tax has actually
been deducted. We should
perhaps leave open the question whether the provision would apply in a case
where tax is payable
on a dividend but the tax is not deducted. Section
33(4) enables the Commissioner to recover the tax in such a case either
from
the recipient of the dividend or the company.
The taxpayer�s alternativument
An alternative argument advanced by txpayer is that the word �exd �exempt�
in s.33 should be confined to dividends the
subject of a specific exemption
under the Act and should not extend to dividends the subject of Article 6
(4) of the
DTA. This argument, if accepted, would only affect the tax
liability of CDC. The short answer to the argument is that there
is no
support at all in the legislation for drawing the distinction suggested by
the taxpayer. Section 33 (1) is quite
general in its application. What is
more the exemption for which Article 6(4) provides has been brought within
the operation
of the Act by ministerial order under s. 39(1).
Conclusion
<
In the result the appeal must be dismissed.
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The orders of the Court are:
1
Appeal dismissed.
2. Appellant to pay the respondent's costs of the appeal.
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