Commissioner of Taxpayer Audit & Assessment v Cigarette Co of Jamaica Ltd (2012)
Loans made to a company by its subsidiary company were not "artificial" transactions for the purposes of the Income Tax Act (Jamaica) s.16.
The appellant Commissioner appealed against an order of the Court of Appeal of Jamaica in relation to income tax assessments he had made against the respondent company (C) for the years 1997 to 2002.
The assessments were in respect of large sums paid by C to another company (X) during that period. C was a subsidiary of X, but not a wholly-owned subsidiary. The payments were consistently shown as loans in both companies' audited financial statements. C was unsuccessful in appealing against the assessments in the Revenue Court, the judge holding that the loans were not genuine loans within the Income Tax Act (Jamaica) s.35, and that they were distributions within s.34. However, the Court of Appeal subsequently allowed C's appeal against that decision. The issue for the Board in the instant case was whether the loans were "artificial" transactions within s.16, and if so, how s.16 and s.34 applied to them.
(1) "Artificial" had a different meaning from, and wider than, "fictitious" within the meaning of s.16(1). Every transaction was in a sense artificial in that it was put together by two or more parties in order to create or alter legal rights and obligations as between them. A transaction was not artificial merely because it was not commercial, or not fully commercial. Income tax affected transactions by way of bounty as well as commercial transactions. However, if a transaction effected in a commercial context was attacked as uncommercial, that might be a reason for looking at it closely. It was necessary to examine the particular transaction and the circumstances in which it was made and carried out in order to determine if it was "artificial". In the instant context, a transaction was "artificial" if it had, as compared with normal transactions of an ostensibly similar type, features that were abnormal and appeared to be part of a plan. However, recognising a transaction as artificial in that sense was an evaluative exercise calling for legal experience and judgment; it was certainly not an ordinary question of primary fact, Seramco Superannuation Fund Trustees v Income Tax Commissioner  A.C. 287 considered (see paras 21-23 of judgment). (2) In the instant case, the group structure was not a reason for treating the loans as artificial. It was, on the contrary, the commercial context in which there was nothing abnormal or artificial in the loans being unsecured, interest-free and documented only by normal accounting and auditing processes. Had C been a wholly-owned subsidiary of X throughout the relevant period, the conclusion that the loans were not artificial would have been clear and irresistible. It would have been a paradigm case of a loan which, although not on commercial terms if looked at in isolation, fell squarely within the proviso to s.35(1). Any element of bounty in the transaction would have remained within the reach of Jamaican corporate taxation. Accordingly, the appeal should be dismissed on the single ground that s.16 had no application (paras 26, 29).