Commissioner of Taxpayer Audit and Assessment v Cigarette Company of Jamaica Ltd (in Voluntary Liquidation)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Walker |
| Judgment Date | 13 March 2012 |
| Neutral Citation | [2012] UKPC 9 |
| Date | 13 March 2012 |
| Docket Number | Appeal No 0028 of 2011 |
| Court | Privy Council |
[2012] UKPC 9
Privy Council
Lord Walker
Lord Mance
Lord Wilson
Lord Sumption
Sir Patrick Coghlin
Appeal No 0028 of 2011
Appellant
Christopher McCall QC
Lackston Robinson
(Instructed by Charles Russell LLP)
Respondent
David Milne QC
Vincent Nelson QC
(Instructed by Myers, Fletcher & Gordon)
Heard on 15 February 2012
This is an appeal by the Commissioner of Taxpayer Audit and Assessment against an order of the Court of Appeal made on 12 February 2010. The Court of Appeal allowed the appeal of Cigarette Company of Jamaica Ltd (in voluntary liquidation) ("CCJ") from an order of Anderson J made in the Revenue Court on 31 October 2007. Anderson J had dismissed CCJ's appeal against assessments to income tax for the years 1997 to 2002, except that the issue of penalties was remitted to the Commissioner for further consideration (with a recommendation that the penalty should be nil, or nominal).
The assessments (totalling about $2.17bn without any penalty) were in respect of large sums (totalling about $6.4bn between 1997 and 2002) paid by CCJ to Carreras Group Ltd ("Carreras") during that period. CCJ was a subsidiary of Carreras, but not a wholly-owned subsidiary. Its shareholding increased from about 90% (at the beginning of the period) to about 99.7% (at the end). These payments were consistently shown as loans in both companies' audited financial statements. But the Commissioner contended that they should for the purposes of the Income Tax Act be treated as distributions subject to income tax deductible at source under section 38 of that Act.
This contention relied in the first place on the wide definition of distribution in section 34 of the Act, and in the second place on section 16 of the Act, which makes special provision in relation to artificial or fictitious transactions directed at the reduction of tax liability.
Before coming to the detail of the statutory provisions it is desirable to set out the primary facts rather more fully than in the judgments below. Before the Board the fact that Carreras did not at any time during the relevant years of assessment have a full 100% shareholding in CCJ (though it had come very close to it, by the end of the period) has assumed more importance than it did below. In addition an agreement dated 1 September 1977 ("the 1977 agreement") may not have been seen in its full commercial context.
The general effect of the 1977 agreement was to merge two cigarette manufacturing businesses. It was partly a sale agreement and partly a shareholders' agreement as to how the merged businesses would be run. Before the agreement was made one business belonged to two companies, which were wholly-owned by Carreras. Rothmans International Ltd ("Rothmans"), an English company, owned about 48% of the shares in Carreras. The purchasing company was CCJ, then named B & J B Machado Tobacco Co Ltd. British American Tobacco Ltd ("BAT"), another English company, owned about 86% of CCJ's ordinary shares and about 81% of its preference shares. All these companies were parties to the 1977 agreement.
At the time of the agreement CCJ had in issue 2,000,000 ordinary shares of $1 each and 5,900 8% cumulative preference shares of $40 each. So BAT had about 1,720,000 ordinary shares, with about 280,000 in other hands. Under the agreement the vendor companies sold their business assets to CCJ for $5.8m, to be satisfied by the issue to the vendor companies, or as they should direct, of 5,800,000 new ordinary shares in CCJ, credited as fully paid. In addition BAT was to sell to the vendor companies, or as they should direct, at a nominal consideration, 1,220,000 ordinary shares in CCJ. The requisite directions were given in favour of Carreras. The result was that on completion CCJ had an issued ordinary share capital of 7,800,000 $1 shares held as follows:
7,020,000 (90.0% approx) Carreras;
500,000 (6.4% approx) BAT;
280,000 (3.6% approx) other shareholders.
The preference shares (with a nominal value of $236,000) are of little importance as the 8% nominal yield was well below the rate of inflation in Jamaica throughout the period. It appears that Carreras owned them all by 1979 [Record p1012].
The 1977 agreement contained provision for management fees (clause 9), trademarks and allied rights (clauses 10, 12, 16 and 17) and a lease of business premises (clause 11). That was the context of clause 13(c)(i) which was in the following terms:
"That [Carreras] may at its sole discretion (but with the approval of [CCJ]) borrow from [CCJ] such amounts as it may from time to time require free of interest, provided however that [Carreras] guarantees to [CCJ] the repayment of such borrowings at such times and in such manner as [Carreras and CCJ] may mutually determine, and provided also that [Carreras] shall not borrow any amounts under this clause until Barclay's Bank of Jamaica Ltd has released BAT from the guarantee referred to in clause 19."
That was part of a clause which was expressed, no doubt advisedly, as a mutual covenant between Carreras (the majority shareholder) and BAT (the largest minority shareholder). It did not and could not bind the other, smaller minority shareholders, who were not parties to the 1977 agreement.
Carreras was referred to in some of the documentary evidence as a conglomerate. Apart from CCJ it had other wholly-owned subsidiaries engaged in a variety of activities: agriculture (especially tobacco-growing), the printing trade, the hotel trade, and the manufacture of biscuits. From 1997 until the end of the 1980s the picture emerging from the financial statements of Carreras and CCJ is that Carreras was actively carrying out treasury functions, so that it was sometimes a creditor, and sometimes a debtor, of its subsidiaries. There were also loans between subsidiaries themselves. So for example CCJ's balance sheet as at 31 March 1984 [Record p1102] shows current assets including about $7.7m due from fellow subsidiaries, and about $0.6m due to Carreras. The unchallenged evidence of Mr Ashenheim (the Chairman of Carreras and a member of the Board of CCJ) was that despite the terms of the 1977 agreement Carreras never charged CCJ any royalties for use of its trademarks. There seems to have been quite a large element of, to put it colloquially, swings and roundabouts, in the management of the group. There seems to be no reason to suppose that at that period the small minority shareholders of CCJ would have had any reason to complain of oppression conducted by the majority, and there is no sign that they did complain.
It is clear from the documentary evidence (which includes several annual reports to shareholders by the Chairman of Carreras, and minutes of its annual general meetings) that Carreras's various subsidiaries were not all equally prosperous. Jamaica's economy was in a bad way and there was severe inflation. The agricultural and hotel subsidiaries had many problems. The business of CCJ, on the other hand, became very profitable. Its profits increased rapidly in every year from 1990 to 2001, from about $42m in 1990 to about $1,334m in 2001 (though some of the increase must have been the effect of high inflation throughout this period).
During 1998 Carreras's holding of ordinary shares in CCJ increased to about 99.7 % [Record p1507]. It appears from the Chairman's report to the annual general meeting in 1998 [Record p 1948] that this included the whole of BAT's holding. BAT's divestment of its holding in CCJ was however only a prelude to a larger investment at a higher level. On 1 June 1999 there was an announcement of an international merger between BAT and Rothmans, and BAT became the holder of 50.4% of the ordinary shares in Carreras [Record p1779].
The outstanding 0.3% of the ordinary shares appears to have been held by a number of small shareholders. The documentary evidence contains resolutions of the CCJ Board of Directors approving transfers to Carreras in 1995, 1998 and 2003 [Record pp1723, 1729 and 2018–2025]. The 1998 resolution included a transfer by BAT to Carreras of 3,603,081 ordinary shares in CCJ. CCJ was issuing bonus shares on an almost annual basis and it is difficult to keep track of the numbers. One of the largest of the small minority holdings, transferred in 2003, was 14,940 shares held by the Kingston Port Workers Superannuation Fund.
It is clear from the audited financial statements that by the 1990s there was no longer much "swings and roundabouts" in the operation of Carreras's treasury function, at least as far as CCJ was concerned. CCJ's large after-tax profits were used to pay a relatively very low dividend ($993,000 in 1990, rising gradually to $3.7m in 2001), the balance of profit was retained, and sums roughly equivalent to the retained profits were loaned, interest-free and unsecured, to Carreras. From 1991 the bulk of Carreras's indebtedness to CCJ was shown in CCJ's balance sheet, not as a current asset but as a separate item [Record p1277]. The corresponding item in Carreras's balance sheet had a note referring to amounts "for which no repayment terms have been fixed" [Record p1296].
Mr McCall QC, for the Commissioner, submitted that in making very large unsecured interest-free loans to Carreras, and leaving them outstanding from year to year during a period of high inflation, CCJ had improperly subordinated its interest to that of Carreras, to the detriment of its own shareholders (especially the minority shareholders). Mr Milne QC, for CCJ, referred to the well-known and well-established practice of one company in a group performing a treasury function, and treating a group of companies as...
To continue reading
Request your trial
-
Ingenious Games LLP; Inside Track Productions LLP; Ingenious Film Partners 2 LLP
...[221] Mr Milne relies upon the Commissioner of Taxpayer Audit and Assessment v Cigarette Co of Jamaica Ltd (in voluntary liquidation) TAX[2012] BTC 116. There the Jamaican authorities challenged an undocumented, interest-free, inter-company loan. The Jamaican Court of Appeal had held the lo......
-
Digicel Jamaica Ltd v Commissioner of Taxpayer Appeals
...provision and its application to the facts of the particular case”, as this court held in Cigarette Company of Jamaica Ltd (in voluntary liquidation) v Commissioner of Taxpayer Audit and Assessment [2010] JMCA —, para. [75] (a decision subsequently upheld on appeal to the Privy Council in C......
-
Kumon Educational UK Company Ltd and Another
...any commercial context. [123]In Commissioner of Taxpayer Audit and Assessment v Cigarette Co of Jamaica Ltd (in voluntary liquidation)TAX[2012] BTC 116 in the Privy Council, Lord Walker considered the meaning of artificial and observed that: [21]It is common ground between counsel that in s......