Over 16 million dollars of tax related payments were at stake in a court battle between Unicomer St Vincent Limited (Courts SVG) and the Inland Revenue Department (IRD); and with the judgement in, UNICOMER is going to have to pay up.
Justice Nicola Byer, in her April 29 judgement, expressed that she thought the case to be a perfect example of what was voiced by another of her learned colleagues, Lord Tomlin, who said, “every man (or business) is entitled if he can, to order his affairs so as that the tax attaching under the appropriate Act is less than it otherwise would be.”
Byer said, “In this court’s mind that is what [Unicomer] did, however the question that was before this court was whether in doing so, the actions of [UNICOMER] went beyond simply ordering their affairs to pay less tax within the provisions of the law, or did their actions go beyond what is legally allowed, and trespassed into the realm of behaviour that was contrary to the law in force.”
The court matter stems from contention that began between the two parties in March 2015 and, according to a local tax expert who provided an analysis of the judgement to SEARCHLIGHT, after auditing the financial statements of Courts for 2007 to 2011, the IRD wrote to Courts objecting to the treatment of several transactions in Courts’ financial statements and income tax returns.
Following this, “…Courts disputed the Comptroller’s (Kelvin Pompey’s) objections who responded by raising an assessment against the Company for $12,666,798.23,” which resulted in the matter going before the Inland Revenue’s Appeal Commissioners (AC).
The AC, in a November 2018 ruling, sided with the Comptroller on three of four matters. Following this, the Comptroller sought to enforce the decision, and sent letters to Courts and then Courts’ bankers demanding that $13,556,007.30 be forwarded to the IRD by a certain date. Courts took objection to the letters, claiming they were unlawful.
Justice Byer had to examine this, and whether the order by the AC in November 2018 ought to be reversed where it relates to the disallowance of sums collected in Credit Protection Insurance (CPI); that withholding tax is chargeable on Payments which were made to Cantebury (A sister company); and the disallowance of the deferral of hire purchase profits.
Credit protection insurance is a charge paid by customers to protect the company against losses from customers who are unable to pay the amount owed and whose items are repossessed.
In this case, UNICOMER was insured by United Insurance (now Massy Insurance), and then reinsured by a sister company, Cantebury Ltd, which is operated in Bermuda.
The policy is called a “Fronting policy”, which “is a risk management technique in which an insurer underwrites a policy to cover a specific risk, but then cedes the risk to a reinsurer. …
“ Because the reinsurer takes on the entire policy risk, it has complete control of the claims process.”
UNICOMER (Courts) submitted the CPI to be a legitimate expense which they were entitled to claim as a deduction for the purposes of tax liability.
“The contention of the [Comptroller] from the start has always been that United was a conduit company simply acting as a go between [UNICOMER] and the reinsurer Canterbury to funnel funds out of [UNICOMER],” the Justice indicated.
The Comptroller had insisted under cross examination that, “…even if United was not a related company to [UNICOMER], that the placement of United was to assist [UNICOMER] in siphoning the funds of self -insurance out of St Vincent and the Grenadines and claim it as an expense.”
However, in order for the court to accept the Comptroller’s point on this issue, it had to have clear evidence before it that United acted solely at the behest of Unicomer and was under its direction, which they found was not the case.
Nevertheless, there was the issue of UNICOMER’s financial statements.
On statements between the years 2008 and 2011, Unicomer had stated that CPI payments were described as “trading transaction with related parties”.
“In this court’s mind this was a clear indication by [UNICOMER] themselves that for several years there was a direct payment of CPI premiums, not to United but to a related party, namely Canterbury,” the Justice said.
It was submitted by UNICOMER that this was an incorrect classification by UNICOMER’s auditors.
However, what was supposed to be an error had stretched on to the year 2014.
“…This court must also consider that [UNICOMER] not only in their financial statements recognised payments to Canterbury for CPI over an eight-year period, but that their very own employee, the OECS Finance Director of the claimant in 2015 Ian Peter, admitted to the Defendant that United was in fact the agent for Canterbury locally,” Byer stated.
The court was satisfied on the balance of probabilities that this was a transaction which fell “afoul” of section 23 of the ITA.
Therefore, the court found that the assessment of the Comptroller to disregard the CPI payments for the purpose of calculating the tax liability of Unicomer stands.
Consequently, the court considered whether withholding taxes should be chargeable on payments made to Cantebury.
The ITA section 66 speaks to deduction of tax from payments to non-residents.
“…The Claimant’s case in relation to the CPI payments having been rejected by this court, it is clear that this court considers that the [UNICOMER] made direct payments to Canterbury which meets the clear definition of a non-resident entity, it being operated and licensed in Bermuda,” the court noted.
Therefore, payments to Cantebury, Byer held, are considered as income and liable to the payment of withholding tax under the legislation.
Another issue was the deferral of hire purchase profits. UNICOMER SVG was treating the full purchase price of the product as income in the year in which the hire purchase agreement is entered into, but for the purpose of income tax, the instalments treated as income in the year in which they are received.
However, while this may be to provide a better picture of the operations to shareholders, well accepted business principles take a subordinate position to the legal rules.
Section 9 (1) (b) of the ITA is unambiguous in determining when income is accrued for the purpose of this Act, stating, “…(b) in the case of a business, in relation to which the Comptroller is satisfied that a commercially recognised system of accounting other than a cash received basis is regularly followed, when it is credited, or should be credited, in the books of account of such person.”
The judge therefore did not reverse the Comptroller’s assessment on this.
Finally, the court examined whether the Comptroller was empowered to take enforcement action to recover the taxes pursuant to the ITA, and to write to the bankers generally, as well as specifically in this case.
It was noted that “The provisions of section 120 of the ITA make it clear that [the Comptroller] is given a wide ambit of powers to ensure that the taxpayer is not allowed to escape their duty to pay the State.”
“The powers of the Defendant include the power to give notice in writing to anyone who holds money on an account for the taxpayer, who is declared an agent and to pay the sum demanded within 15 days of the service of such notice.”
In one of his correspondence, UNICOMER had indicated that the Comptroller “…went on to purportedly instruct that such payment was to be made on the same day of the correspondence or the day after, in other words in a period shorter than the statutory maximum of fifteen days.”
“…When this court considers the actions of [the Comptroller] holistically, this court finds on a balance of probabilities that the actions of [the Comptroller] was motivated by the desire to have the amount claimed factored into his year-end target amount,” the Justice decided, which was the position put forward by Unicomer’s lawyers.
She said the Comptroller had himself said under cross examination, “when asked whether his target would have been at risk for 2018 if he had not collected these taxes or at least demanded them, his response was that ‘the amount would [have] factor[ed] into the collection for the year…’”
Therefore, although he had the power to issue the demand, the way he did so was deemed to be wholly unacceptable and amounting to an abuse of the power imbued in him under the ITA.
The IRD has stated that they are anticipating the now approximately $EC16 million judgement debt, which includes interest accrued over the years, to be paid in a timely manner.
The IRD was represented by Duane Daniel and Jenell Gibson, while Unicomer was represented by Dr Claude Denbow and Paula David.