Case Note 3 of Volume 3, 1999

Solomon Islands Plantation Ltd. v Commissioner of Inland Revenue

Civil Case No 187 of 1997
Solomon Islands High Court, unreported,
17th August 1998

This decision involved a dispute as to the deductibility of a dividend payment paid by the appellant, which was a company resident in the Solomon Islands, to two other companies. The respondent Commissioner had disallowed the deductions in each case. The decision rested upon whether the payment of a dividend, which was exempt from taxation under other provisions of the Act, fell within the scope of the provision allowing for deduction of dividend payments made by a Solomon Islands resident company, namely sub-section 14(2)(m) of the Income Tax Act (SI).

The sub-section provided as follows : 

"14(2) Without prejudice to the operation of sub-section (1), in computing the gains and profits of any person for any year chargeable to tax under section 3(a), the following amounts shall be deducted –

(m) the amount of any dividends paid in any year by a company resident in Solomon Islands from which tax has been deducted in accordance with section 33."

In this context section 33(1) of the Act provided : 

"To the extent that any dividend is not exempt from tax, every company resident in Solomon Islands shall deduct from the amount of any dividend paid to any shareholder out of any profits whether or not charged to tax under section 3, tax at the rate of twenty cents (20c) in the dollar for persons who are resident in Solomon Islands and at the rate prescribed in section 32(1) for persons who are not resident in Solomon Islands."

The appellant had paid dividends during the relevant year to other companies. Those dividends were exempt from tax for the purposes of section 33. Clearly the main issue involved an interpretation of the relationship between sections 14(2)(m) and 33. The Court was of the view that the fact a dividend was subject to an exemption did not mean that it was not in principle subject to taxation. The correct view was that it was taxable if it were not for the exemption. 

But where there was an exemption could it be said that, for the purposes of section 14(2)(m), it an exempt dividend was one "…from which tax has been deducted in accordance with section 33.." as the section requires. Put another way: "can dividends exempted from tax be regarded as or deemed to have had tax deducted in accordance with section 33." (at p. 2) Clearly the former phrase contains a certain element of ambiguity. Palmer J. concluded, however : 

"The true meaning of section 33(1) in my respectful view is that tax is deductible only under one condition. That the dividends are not exempt from tax. In other words, they are subject to tax. If they are exempt from tax, then no deduction at the rates specified are permitted. It is not so much whether there is another rate of deduction at nil rate, but whether the dividends paid are exempted or not. It is not that the dividends are not taxable. Rather it is because of the exemption, that is why no deduction is permitted."

This conclusion, he suggested was supported by reference to other provisions of the Act; for example, section 33(3). It was a fallacy to suppose, he said, that the Act imposed three distinct rates of tax: one for residents at twenty cents in the dollar, a second for non-residents at the prescribed rate (35c in the dollar) and a third one arising by inference from section 33(1); that is, a nil rate of tax. There was no basis for adopting the third hypothetical position in order to understand the notion of an exemption. Hence, exempted dividends cannot possibly be regarded as having had taxation deducted in accordance with section 33(1)

Section 14(2) permits a deduction from the gains and profits of the company paying the dividend; viz. the appellant company. Here, as regards one of the recipient companies, the dividend was paid to a company which was a resident of the United Kingdom with which the Solomon Islands had a Double Taxation Agreement at the relevant time. The exemption provided to the recipient company, a resident of the United Kingdom, arose under Article 5(4) of that agreement. The purpose of the exemption was effectively allow the dividend to be brought to tax in the United Kingdom, rather than in the Solomon Islands.

Clearly, the exemption applied under this Article was only in respect of dividends received by that company. This had nothing whatsoever to do with the taxation of the profit or gains of the taxpayer in this case, the paying company. Indeed, the Income Tax Act differentiated clearly between the taxation of income and the taxation of profits or gains (see section 3) even though for the purposes of calculation of total income for assessment purposes, the two were required to be aggregated by section 2(1).

The court held that, in this context, the purpose of section 14(2)(m) was to provide relief against the payment of doubt tax with respect to dividends. Rejecting a submission of the appellant, the court held that the taxation of exempted dividends would not amount to a contravention of the Double Tax Agreement. Even though the gains or profits of the appellant, out of which the dividends were in fact paid, were subject to taxation in the Solomon Islands, the section would not apply. This was because, as noted above, the Act required that the taxation of dividends, on the one hand, and of gains or profits, on the other, be dealt with separately. Section 14(2)(m) and section 33(1) were thus dealing exclusively with dividends. The position relating to taxability of the source of the dividend payment, i.e. the gains and profits of the appellant company, was an irrelevant consideration.

Professor R. Hughes,
Port Vila,
January 1999