Pay corporation tax

A High Court judge has dismissed an appeal by British American Insurance Company (BAIC), a Clico subsidiary, over an issue that hinged on whether the company was liable to pay corporation tax at the rate of 40% on money transferred to its shareholder account. Clico is owned by energy magnate Lawrence Duprey. Justice Roger Hamel-Smith, in a judgment dated October 20, described the issue as a relatively narrow one.  It involved liability for corporation tax in circumstances where the taxpayer company carries on long term insurance business, the judge said. According to the facts, in 1991, the company transferred the sum of $710,524 from its long term insurance business to the shareholder’s account of the company.

The issue for resolution, the judge said, was whether, given the relevant provision of the Corporation Tax Act, the company became liable for corporation tax at the rate of 4% on the whole or a proportion only of the amount transferred. The company filed its corporation tax return for the year of income 1991 in which the declared chargeable profits of $3,463,333.00 and a tax liability of $519,499.86. The Board of Inland Revenue (BIR) carried out an audit of the taxpayer’s books and records and found that a sum of $710,524.00 was transferred from the business to the shareholder’s account of the company. The BIR concluded that the sum transferred to the shareholder’s account was chargeable to corporation tax at the higher rate of 40%.

The BIR then issued a notice of assessment showing its adjustment to the corporation tax return, increasing the tax liability by $520,677.45. But the company objected to the assessment and the matter then went to the Tax Appeal Board. The judge said that in order to resolve the issue it is first necessary to understand the tax regime under which the insurance company operated. BAIC, he explained, is an assurance company and carries on long-term insurance business. The Act, he said, makes provision for taxation of company profits but the Fourth Schedule to that Act deals specifically with companies that carry on long-term insurance business. Such business is treated as a separate business for the purposes of corporation tax, he said. In the case of a resident insurance company, the Act provides that it is liable to corporation tax on the full amount of the profits of the company’s business.

As regards the long-term insurance business carried on by such a company, however, “such business shall be treated as a separate business from any other class of business carried on by the company,” the judge said. “In other words, for purposes of corporation tax, while the liability for tax remains on the company, it must maintain separate accounts,” the judge said, stressing that it this separate business the court was concerned about. While the insurance company did not dispute the fact that the sum in question was transferred from the business to the shareholder’s account of the company, it contended that that sum represented profit derived from two sources: income from the investment fund and from premium income for that fiscal year. It also argued that for the purposes of corporation tax, profits of the business are confined to profits from the former source only.

Any surplus from the other source is not considered profits on which corporation tax is payable, the company argued. Accordingly, the company submitted that the BIR was not authorised to charge tax on the entire amount transferred. Tax is chargeable only on that portion derived from the profits of the investment fund only, the company said. The judge said he found the company’s arguments untenable, noting that it was obvious that the long-term insurance company receives special consideration under the Act, given the need to review claims and future liabilities from time to time. Accordingly, it is treated as a separate entity for tax purposes. Justice Hamel-Smith dismissed the appeal, saying it was quite evident that the whole of the monies so transferred fell within the terms of the Act.