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Company A v Fiji Revenue and Customs Authority [2015] FJTT 4; Income Tax 02.2014 (29 June 2015)

FIJI TAX TRIBUNAL

Decision
Section 89 Tax Administration Decree 2009

Title of Matter:

COMPANY A
(Applicant)

v

FIJI REVENUE AND CUSTOMS AUTHORITY
(Respondent)

Section: Section 82 Tax Administration Decree 2009
Subject: Application for Review of Reviewable Decision

Matter Number(s): Income Tax No 2 of 2014

Appearances: Ms M Jackson and Mr V Faktaufon; Saumatua, Bale & Faktaufon, for the Applicant
Mr O Verebalavu, FRCA Legal Unit for the Respondent

Dates of Hearing: Tuesday 3 March 2015
Wednesday 15 April 2015

Before: Mr Andrew J See, Resident Magistrate
Date of Decision: 29 June 2015.

VALUE ADDED TAX DECREE 1991 –Second Schedule Zero Rates Supplies; Provision of services outside of Fiji. Section 21(1) Tax Administration Decree 2009 – Burden on taxpayer to establish assessment excessive.

Background

1. The Applicant Taxpayer is a company registered in Fiji. The company is involved in the provision of various recreational activities, including water sports, fishing and parasailing.[1] As part of the Taxpayer's income derived in 2008,[2] was the amount of $218,636.00 that according to the Applicant was invoiced to a related entity, as charges for the provision of promotional services associated with a brand of boats, of which the Applicant was the licensed dealer in Fiji. In a random audit conducted by the Respondent in 2011, that amount of income was identified as not having been declared on Company A's Value Added Tax (VAT) Return for the coinciding period. The Respondent contends that this amount is amendable to VAT.
   
2. At the heart of the application for review as it was initially made, were two issues. The first, was whether Section 14(2) of the Second Schedule to the Value Added Tax Decree 1991, ("the VAT Decree") that was introduced into the Decree with an effective operative date of 1 January 2009,[3] can be relied on when assessing taxation arising out of the 2008 income year. The second, was whether or not the 'promotional services' charged by Company A to an overseas related entity, fall within the meaning of "the supply of services which are physically performed outside Fiji" and therefore exempt from 'value added taxation', for the purposes of Section 13 of the Second Schedule to the Decree. At the preliminary stages of this matter, the parties abandoned any reliance on Section 14(2) of the Decree, presumably on the common understanding that it did not commence until 1 January 2009.[4]
   
3. The application is heard in accordance with the relevant provisions of the Tax Admrnistration Decree 2009 and the Magistrates Court (Amendment) D 2011.atn matters ters of this type, the burden is on the Taxpayeprove that the assessment is excessive.[5]
   

Company A

4. It is useful at the outset to consider the structure and related activities of the Taxpayer. According to Mr Faktaufon, Company A was registered in Fiji and based in Nadi Town. The company became registered to make taxable supplies in accordance with Part V of the Value Added Tax Decree 1991 on 20 March 2006. The company has two equal shareholders, Mr C and Ms C, who act as trustees for a unit trust.[6] The related entity in which it is said paid for the promotional services of Company A,[7] was Company C, a company registered in Australia and 100% owned by Mr C.
   
5. The first witness called by the Taxpayer, was Company A's General Manager, Finance and Administration, Mr W. While the witness was able to give the Tribunal an understanding of the nature of the business undertaken by the Taxpayer, he had only a very short period of employment with Company A. He certainly had no firsthand knowledge of any events relevant to the issue in dispute.[8] On that basis, the witness was excused and the matter adjourned to 15 April 2015. When the matter resumed, arrangements were made for the conducting of witness evidence by a SKYPE conference call to Australia. Counsel called Mr K, who was the Company Accountant for the A Group of Companies. Mr K advised the Tribunal that he has been associated with the group, since the incorporation of Company A approximately 8 or 9 years ago.
   

Nature of Promotional Services Provided

6. In his examination in chief, Mr K advised that the invoicing by the Taxpayer to Company C in Australia,[9] was to charge for promotional services provided by the Taxpayer in Australia. His evidence was that the VAT return coinciding with this period, was prepared by an employee of Company A in Fiji, who it was said would have not known to include the related amount.[10] The witness gave evidence that he assisted in the preparation of a letter (Exhibit A 6) objecting to the inclusion of the VAT charged on the invoice amount of $218,636.00. [11] At Paragraph 1 (ii)(a) of that letter, it states among other things:-
   

(the amount of $218,636.00) was billed by the Australian entity and under the provisions of the Fijian Taxation Act VAT Provisions, income earned (sic) overseas country and not subject to VAT payable on that amount. The income was earned in Australia and the Trust rendered account for that Income therefore is not subject to VAT Tax in Fiji. [12]

7. Mr K was then taken by Ms Jackson of Counsel to paragraph 1 of the Objection Decision of the Respondent dated 13 December 2013. He was asked to read the wording of the paragraph which states:
   

$218,636.00 income earned in Australia from (Company C) for the marketing and promotion of (R) brand of boats by Company A in Fiji. The taxpayer claimed this to be treated as VAT exclusive, (Company A) is the dealer of (R) boats in the Pacific and the only boat that was in Fiji at the time of promotion was the "( R ) 1" but was never sold.

Legislative Authority is in accordance to 2nd Schedule of VAT Decree 1991 Par 14(2):

For the purposes of this paragraph, supply of services will be zero-rated where and to the extent that these services are supplied for and to a person who is not resident of Fiji and who is outside Fiji at the time the services are performed for use and benefit outside Fiji and the supply is directly connected with goods or real property situated outside Fiji or with the rights that are for use outside Fiji.

8. Counsel then asked Mr K, "what is ( R ) 1?". Mr K replied, by stating:
   

It is a boat that is still owned by the company and situated at Port Denarau marina and that particular boat is used for fishing charters, transport of persons delivered to islands and generally its chartered by visitors to Fiji.

9. In cross examination Mr Verebalavu asked the witness,
   

what is the connection between Company C and ( R ) 1?

10. Mr K replied, " there is no connection whatsoever."
    
11. Later, Mr Verebalavu returned Mr K to the narrative contained within the invoice that states:
    

Commission and Fees due by your Company for work undertaken on your behalf in promoting all work undertaken for the ( R ) Brand of Boats and for which our Company holds the Fijian licence

12. Mr Verebalavu asked, " is it (Company C) or (Company A) who holds the Fiji Licence?"
    
13. What followed was evasiveness by Mr K that thereafter permeated the remaining evidence he provided the Tribunal. In the first instance, he avoided directly responding to Mr Verebalavu's question as to who was the licensee and instead made a great issue of the fact that the boat in Denarau had not been sold and was being used in Fiji for recreational services. When asked by Counsel what was the purpose of the boat being brought into Fiji in the first instance?, Mr K also avoided that question. He then took the extraordinary step as a witness in proceedings, by objecting to the leading of evidence by Counsel. Specifically his objection was in relation to his own memorandum forwarded to the Respondent on 12 July 2013.[13] The witness protested:
    

What was the reason that these were not disclosed previously? My understanding is that the Court documents have to be properly disclosed so we are familiar with them. I am not sure whether the Counsel will object to it being submitted. [14]

14. The point being, that contained within that memorandum dated 12 July 2013, was the likely answer to Mr Verebalavu's question and that is to use the words contained within that document:
    

The company has one boat in stock for sale namely ( R) 1 which to date they have been unable to sell and as a result we have since lost the ( R) dealership

15. When questioned in relation to this apparent inconsistency, Mr K stated that "the boat had nothing to do with the fees charged to Company C...absolutely nothing. [15]
    

What Was the Nature of the Services Provided?

16. So the critical issue thereafter became what were the services provided in order to warrant the zero rating? In this regard, Counsel asked whether Mr K had an agreement between Company A and Company C for these promotional services. His response, was "No".
    
17. Again the evidence of Mr K needs to be seen in context. At one juncture, he stated that the "investigations department never asked for a copy". When asked by Mr Faktaufon as to whether there was an oral agreement in place, his response was "no there was no agreement". At this point the Tribunal sought to ask the witness various questions relating to the invoice and the subsequent discussions held with auditors. When asked by the Tribunal was there an oral agreement in place, Mr K responded "that's right". The following exchange then ensued:
    

Tribunal: So who was the oral agreement between?

Mr K: Just between Directors of both companies.

Tribunal: Which Directors you referring to?

Mr K: The Directors of (Company C) (Mr C) and also Directors of

(Company A.)

Tribunal: (Mr C) was one of the Directors?

Mr K: Yes.

Tribunal: Involved in the oral agreement?

Mr K: Yes.

18. The questions by the Tribunal continued:
    

Tribunal: Mr K I ask you further in relation to this oral agreement, you say there was an oral agreement between Mr( C) as the Director of (Company A), Is that correct?

Mr K: That's correct. It was orally agreed.

Tribunal: And who did he have the oral agreement with?

Mr K: Well between the two companies...

Tribunal: No ..you said there was some other Director? Who was the other Director?

Mr K: There is only one Director who is the Director of both companies.

Tribunal: So Mr (C) had an oral agreement between himself?

Mr K: Well he can as a representative of the company... he represented the two companies...he can make an agreement for payment of fees...

19. The Tribunal is of the view that Mr K was simply being evasive and deliberately obstructive in the way in which he gave his evidence. In this regard, the Tribunal specifically asked of Counsel for the Applicant, what will be the evidence as to where, when, how and who provided the services to Company C? The Response noted by the Tribunal, was "we will just be relying on our witness".
    
20. In such circumstances, the Tribunal considers based on the evidence before it, that it is more likely that Company A did attempt to sell the vessel ( R ) 1 in Fiji and thereafter charged Company C in Australia for those services. Whether as the payment for that invoice, monies were offset against any offshore loan account is of no real relevance to the analysis. The issue is, were the services capable of being zero rated for the purposes of Schedule 2 of the VAT Decree 1991 and if not, were they otherwise taxable supply of which taxation is to be imposed.
    

Evidence Led by Respondent at Hearing

21. The Respondent called two witnesses to assist in understanding the way in which it came to its position. The first witness was a Principal Auditor, Ms Seleti Kete who advised that the discrepancy in the VAT Return came to her attention as part of a random audit of taxpayers in 2011. According to Ms Kete, the group of companies, operating in Australia and Fiji had several contacts that she dealt with, both in Fiji and Australia.[16] The first issue that was identified by Ms Kete, was that one company had assumed responsibility for the lodging of the VAT return, whereas the relevant income tax return was lodged by trustees on behalf of a Unit Trust. Ms Kete advised the Tribunal that as part of that process of review, the Taxpayer had been advised that it needed to change the way it was submitting tax returns.
    
22. Ms Kete stated that arising out of the comparison of the income tax and VAT returns, that a discrepancy in sales of approximately $270,000.00 had been identified of which approximately $68,000.00[17] related to commission received by the Taxpayer from sales desk and equipment hire at hotels and resorts.[18] According to the witness, she in turn advised Ms RS of the discrepancy and raised a Notice of Amended Assessment No 1 to adjust for that amount.[19] By letter dated 14 September 2012, Mr K as Group Accountant, wrote to the Respondent indicating that "we have reconciled the difference between the sales figure shown in the accounts and the sales figure shown on the VAT returns".[20] According to the witness, Ms RS had indicated that she would get back to the Respondent in relation to this matter. Ms Kete also noted that the Taxpayer had not notified the Respondent in relation to the extension of its taxable activities for the purposes of Section 24 of the Decree. [21] The second witness called by the Respondent, was Ms Shelley Chand, who works as an Auditor with the Authority. According to the witness, the issue of the boat ( R ) 1 being stock for sale in Fiji, of which a commission may be paid was first identified in the letter from Mr K to Ms Kete of the Respondent, on 12 July 2013. The Tribunal recalled Ms Kete to just clarify the extent of discussions that had transpired with the Taxpayer and its representatives prior to this date. Ms Kete indicated at least 4 separate discussions that took place between the parties.
    

Submissions of the Parties

23. The Applicant has raised a preliminary issue as to whether the Respondent can further amend the Notice of Assessment relating to this application for review, by recalculating the amount due in a Further Amended Assessment issued on 14 April 2015.[22] In making this submission, the Applicant relied upon Section 48 (1) of the Value Added Tax Decree 1991. It should be noted somewhat concerningly, that this provision has been deleted from the Decree by virtue of the introduction of the Tax Administration Decree 2009. Section 119 of the Tax Administration Decree makes clear that it applies to all tax decisions made before the commencement date.[23] As the submissions of the Respondent correctly set out, the governing principles that shape amendment of tax assessments are found at Section 11 of the Tax Administration Decree. The combined effect of Sections 11(1) and (4) of the Decree, envisage corrections that may take place outside of a six year period.[24] At page 8 of the Applicant's Closing Submission,[25] it is asserted that the Group Accountant Mr K, was unable to inform the Tribunal on who the Directors and Shareholders of Company C were. That is simply incorrect. Mr K was quite clear that insofar as the Directors of Company A and Company C are concerned, that Mr C was the common Director of both companies. His evidence when asked by Ms Jackson as to what shareholding Mr C had in Company A, was that he held 48%. His evidence in response to the Tribunal's question as to how many shareholders owned Company C, was " I have only got one shareholder – (Mr C)".[26]
    
24. The Applicant appears to rest its case on the evidence given by Mr K, that the services were provided by the taxpayer in Australia to its related entity Company C. Mr K did not clarify at all exactly what were these services. He certainly did not suggest he had any first hand knowledge of them. To the contrary, his opposition to the admission of Exhibit R3, was far more instructive as to the apparent change of position that has taken place.
    

Were the Services Provided by the Taxpayer to Company C Taxable Supplies?

25. Based on the available evidence it would appear more likely that the invoice the true subject of this application (Exhibit A2) came about as a result of an internal decision made on behalf of the two entities of the (A) Group of Companies, where the Taxpayer was to be paid for the promotional work associated with the sale of the vessel ( R ) 1. The fact that the vessel was not sold and is now being used for other purposes is really quite irrelevant. The definition of "taxable activity" is provided for at Section 4 of the Decree.
    

Section 4

Meaning of the term ―taxable activity

(1) For the purposes of this Decree, the term ―taxable activity means

(a) any activity which is carried on continuously or regularly by any person, whether or not for pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to another person for a consideration; and includes any such activity carried on in the form of a business, services, trade, manufacture, profession, vocation, association, or club; and

(b) without limiting the generality of paragraph (a) of this subsection, the activities of any local authority or public authority.

(2) Anything done in the commencement or termination of a taxable activity shall be deemed to be carried out in the course or furtherance of that taxable activity.

26. Given that Mr K's correspondence to Ms Kete of the Respondent dated 12 July 2013, speaks of the boat ( R ) 1, being unable to be sold as late as that time, provides sufficient continuity of the promotions activity to fall within the definition of 'taxable activity' for the purposes of Section 4.[27] The Taxpayer is clearly a registered person for the purposes of the Decree. Section 15 of the Decree imposes a taxation on the supply in Fiji of goods and services. The exception to that is in the case where such supply is a zero rated supply.
    

Was the supply of promotional services physically performed outside of Fiji?

27. The categories of case that establish the capacity to claim zero rated supply are set out within the Second Schedule of the Decree. In the present case, the onus is on the Taxpayer to demonstrate to the Tribunal that the promotional services that are described within the Invoice dated 30 November 2008, have been physically performed outside of Fiji.[28]
    
28. The language of Section 13 of the Second Schedule is quite clear, the services need to be "physically performed" outside of Fiji. Counsel for the Applicant was in some ways alerted to the fact that the Tribunal would need to understand who provided these services, where were they provided, to whom and over what time. The response to that inquiry was however, that Mr K as the Group Accountant would be providing the sole evidence in this regard. The best evidence he provided was that the invoice was
    

.. as a result of those services which one of the employees was working in Australia too, ......with that company in Australia did sell a boat which was sold in Australia to an Australian ... because of the work done by (A) Unit Trust that was sort of reasonable feeling that they should be reimbursed or get some sort of commission for work done in Australia because we haven't got a (R) licence in Australia.

29. Yet when Mr K was questioned further in relation to the purpose of having boat R(1) in Fiji in the first instance and his memorandum letter to Ms Kete dated 12 July 2013 (Exhibit R3) he again protested to Counsel:
    

Ok Answer this question Vama, why are we not objecting to this particular... it has nothing to do with ... this particular letter was sorted out was just trying to .. what the Counsel for the Respondent should deal with is just stick to the basis of the Objection and not that was already sorted out... I always had discussions with .. and a couple of times with the investigator .. all these matters were sorted out and

30. Yet further and in apparent contradiction of himself, Mr K stated in cross examination:
    

(Company C) wouldn't have paid commission on a boat that (Company A) sold

31. Later when the Tribunal sought clarification with Mr K as to what was discussed with the Respondent's auditor in a meeting held to reconcile the differences between the income tax return of the Unit Trust and the VAT Return for Company A, the following exchange took place:
    

Tribunal: ........you were involved in a process where you had to identify zero rated sales. Is that correct?

Mr K: Yes.. what actually had happened at that time, we didn't actually have a copy of the VAT Decree and at that stage the Decree was shown and we discussed it with them that because it was stated as income, it wasn't income generated in Fiji. It was exempt from VAT.

Tribunal: That's not what I am leading to. What I am asking you is that in the course of the discussions in relation to what constituted zero rated sales for the year.. you identified with FRCA that you (had) discussions in relation to hotel commissions. But you also had discussions at that time in relation to the marketing services or the commission fees provided to (Company C). .

32. After much further prevarication the witness stated " I cant recall that .. if it had taken place". When asked again by the Tribunal, "so you cannot recall the nature of the discussion in relation to the zero rated supplies. Is that your evidence?", Mr K replied " I cant recall".
    
33. This is a case that in many respects is quite a simple one. What the Taxpayer needed to do, was to demonstrate that the services described within the invoice were physically performed overseas. The evidentiary backdrop though provides little support to the possibility that this has taken place. In the first place, the failure to claim and or identify the zero rated sales arises out of an audit undertaken by the Respondent in 2011. Company A had been registered to claim and pay VAT since 2006. It is not as if the Taxpayer would not have been familiar with completing the VAT returns.[29] Secondly, Mr K claims that he cannot recall the nature of the discussions he had with auditors regarding the amount in dispute, the subject of the invoice. This too beggars belief, particularly given the centrality of the issue to this application. Further, when asked by the Tribunal did Mr K personally provide that invoice to the Respondent during the course of the audit discussions, Mr K was evasive and would not specifically attribute that conduct to himself.[30] Finally, the witness became quite agitated when giving evidence to the Tribunal, particularly when Counsel for the Respondent sought to question him in relation to his earlier memorandum dated 12 July 2013, that indicated that there had been a boat ( R ) 1 in Fiji, that Company A had not as yet been able to sell. The Tribunal has formed the view that Mr K's evidence was self-serving, deliberately evasive and quite obstructive. Having regard to the totality of the witness evidence and materials before this Tribunal, there is no evidence of any significance to support the Applicant's contention that the services provided by Company A to Company C, are zero rated for the purposes of the Second Schedule.[31] The Taxpayer has failed to discharge the burden of proof for the purposes of Section 21 (1) of the Tax Administration Decree 2009.
    

Issue of Penalties Imposed by the Respondent

34. Finally, the Applicant contends that the penalties imposed by the Respondent in accordance with Section 46 of the Tax Administration Decree 2009 should not have been made on the basis that Section 46(5) excludes any such penalty where a false statement may be made in the case where a "reasonably arguable position" existed. [32] On the other hand, the Respondent argues that the non-declaration of taxable supplies and the failure to even attempt to identify those as tax exempt, demonstrates wilfulness on behalf of the Taxpayer. The effect of the Respondent's Closing Submission is to suggest that the Taxpayer wilfully sought not to disclose this transaction. A transaction that has no supporting documentation between the entities and which is said, has been introduced by the Taxpayer in a bid to mislead the Respondent in undertaking its roles under the Tax Laws. Having regard to the way in which the witness evidence has been received in the Tribunal and based on all of the material that has been presented by the parties, the conduct of the Taxpayer and in particular its Group Accountant remains quite questionable. While the Taxpayer was free not to call Mr C to provide direct evidence in relation to the central issues being examined, in particular what were the services provided, when, where and by whom, in not doing so, it must also then suffer the consequences, if that evidence which is provided on behalf of the Taxpayer, appears hostile, evasive and deliberately misleading. The questioning by the Tribunal of Mr K, in relation to the agreement in place between Company A and C, is a case in point. The opposition that Mr K made in relation to the admission of his own document dated 12 July 2013, which reveals his own change of position, is another. The Tribunal concurs with the submissions of the Respondent, that the penalty imposed should be the maximum one, on the basis that there appears to have been a deliberate and ongoing attempt by the Taxpayer, or at least its representative, to mislead this Tribunal and the Fiji Revenue and Customs Authority.
    
35. The Tribunal therefore dismisses the Appeal and increases the relevant penalty to 75% on the basis that the omission by the Taxpayer to fail to declare the taxable supply was done, knowingly or recklessly.
    

Decision

The Tribunal orders that:-

(i) The Application of the Taxpayer is dismissed.

(ii) The Respondent issue a further Notice of Amended Assessment to reflect the variation to the penalty now to be imposed.

(iii) That the Respondent be free to make application for costs by no later than 28 days.

Mr Andrew J See
Resident Magistrate

^[1] Opening oral submissions of the Applicant.
^[2] Albeit that it was identified in the income return of a related Unit Trust.
^[3] Refer Promulgation No 31 of 2008.

[4] See Section 1 of Value Added Tax Decree (Budget Amendment) Promulgation 2008 (Promulgation No 31 of 2008).

^[5] See Section 21(1) of the Tax Administration Decree 2009.
^[6] It should be noted that the income tax return for that unit trust, was also the subject of discussion during the course of these proceedings and is made mention of further on during this decision.
^[7] Whether directly or indirectly.
^[8] For that reason, the Tribunal impressed upon Counsel for the taxpayer, that it would be more beneficial to seek to rely on the best evidence available within the company. The matter was adjourned to enable alternative witnesses to give evidence.

^[9] Refer Exhibit A2.
^[10] Refer Exhibit A3.
^[11] An amount of $30,071.00.
^[12] It was acknowledged by Counsel for the Respondent that Section 14(2) of the Second Schedule of the Decree, is not applicable in this case.

^[13] Exhibit R 3

^[14] What thereafter was an explanation by the Tribunal to the parties as to the purpose of the Section 83 documents that are utilised in proceedings and the way in which documentary evidence is thereafter allowed.

^[15] In some respects his position that “Company C wouldn’t have paid a commission on a boat that Company A sold”, appears at loggerheads with Paragraph 4 of the

^[16] Ms RS and Mr UK in Fiji and Mr K and Ms C in Australia.
^[17] This figure is more likely to be that calculated as approximately $52,000.
^[18] This amount subsequently did not form part of the contested proceedings. It is noted that the amount of $52,000.00 was identified by the Taxpayer as an administration fee charged by the Trust to another related Trust.
^[19] See Document B within the Respondent’s Bundle of Documents
^[20] See Exhibit R2.

[21] That is, it was now also involved in the supply of promotional services. Counsel for the Respondent referred the Tribunal to A Haulage Business v Fiji Revenue and Customs Authority [2012] FJVATT 2; Note also the effect of Section 71(b) of the Decree for the failure to notify.

^[22] See Exhibit R2 where the calculated amount has been modified by the Respondent to correct a mistake in calculation.
^[23] The commencement date is 1 January 2010. (See Section 1(2) of the Decree).
^[24] There is no prejudice arising out of that type of amendment to the conduct of these proceedings.

^[25] See paragraph (g)
^[26] Mr C would have clearly been the best witness to have given evidence in relation to the relevant transaction and the nature of the relevant services provided. Though he was not called by the Applicant.
^[27] That is, from the date of invoice in 2008 to some time before the date of Mr K’s correspondence on 12 July 2013.

^[28] See Section 13 of Second Schedule to the Decree.
^[29] It is hard to comprehend that the Taxpayer did not have access to the Decree as was intimated in the evidence of Mr K.
^[30] Not that this was a particularly important issue, but it did go to the conduct of Mr K and his credibility as a witness.
^[31] Evidence of significance would have been such things as the employment documentation of the employee involved; evidence of the employee working in Australia such as wages, tax records and visa details; dealership records; proof of sale and purchase of vessel in Australia; corroborating evidence from the owners of the boat company, Company R and of course the dealership licence itself, which would likely demonstrate the boundaries and territorial scope of the Fijian licence.
^[32] See specifically Section 46(5)(b) of the Decree.