HIGH COURT OF SOLOMON ISLANDS

Civil Case Number 98 of 2003

Solomon Breweries Limited

v.

The Commissioner of Inland Revenue

High Court of Solomon Islands
(Palmer J.)

Date of Hearing: 29th July 2003
Date of Judgement: 23rd September 2003

Sol-Law for the Applicant
Attorney General for the Respondent

Palmer J.: Solomon Breweries Limited (“Solbrew”) was set up pursuant to a Memorandum of Understanding (“the MOU”) entered into with the Solomon Islands Government (“SIG”) on 22nd November 1989 for the purpose of establishing a brewery in Solomon Islands. One of the incentives given to the company under the MOU was a tax holiday for 8 years granted under section 7(5) of the Investment Act (cap. 142) as read with section 10(1) of the Income Tax Act (cap. 123). 

Initially the date of commencement of the tax holiday was in issue but by the time the matter came before me for hearing, the parties had agreed that it commenced on 1st April 1993 and expired on 31st March 2001.

Facts not in dispute

A number of facts are not in dispute, these include the following; that –

(i)	Solbrew was an approved enterprise pursuant to sections 5, 6, 7 and 8 of the Investment Act. The above provisions require any foreign undertaking in the country to obtain approval from the Investment Board (“the Board”) before it could commence any business activities in the country. A company that has obtained approval from the Investment Board is required in turn to be registered as an approved enterprise and issued with a certificate of approval. Solbrew’s Certificate of Approval was issued on 22nd November 1989 – certificate no. 24/89.

(ii)	The tax holiday referred to in the MOU was a tax incentive granted under section 10(1) of the Income Tax Act. Under section 7(1) – (3) of the Investment Act, an approved enterprise could apply to the Board for grant of incentives (including tax exemptions) in respect of the proposed investment or enterprise. In the case of tax exemptions this comes under the auspices of the Incomes Tax Act. Section 10(1) of the Income Tax Act gives power to the Commissioner of Inland Revenue (“the Commissioner”) on the recommendation of the Board to exempt from income tax the profits and income of any approved enterprise for the period specified in the certificate of approval. I quote:

“10.(1) The Commissioner on the recommendation of the Board may exempt from income tax the profits and income of any approved enterprise for the period specified in the certificate of approval.”

(iii)	The period of the tax exemption of 8 years complies with section 10(2) and the First Schedule of the Income Tax Act.

(iv)	No further tax exemption was ever granted to Solbrew under section 10(3). It is important to bear in mind that subsection 10(3) allows the Commissioner, on the recommendations of the Board to grant such approved enterprise a further tax exemption for a period not exceeding five years where the requirements specified in section 9 of the Investment Act had been satisfied. Subsection 10(3) of the Investment Act reads:

“(3) Where an approved enterprise referred to in subsection (1), satisfies the requirements specified in section 9 of the Investment Act, the Board may recommend to the Commissioner to grant such approved enterprise a further tax exemption for a period not exceeding five years.”

Section 9 of the Investment Act in turn provides:

“9(1) No approved enterprise shall be entitled to more than one tax exemption or other incentives within the agreed period, in respect of any particular investment or undertaking, so however, that any such approved enterprise may make application for a further tax exemption period provided –

(a)	substantial additional investment is proposed;

(b)	the approved enterprise has satisfied the conditions stipulated in relation to its original investment; and

(c)	a part of the profits earned is reinvested in the particular investment or undertaking as specified in the certificate of approval or as otherwise specified by the Board.

(2)	Where the Board is satisfied that an approved enterprise referred to in subsection (1) has satisfied the conditions stipulated in its original investment and that the additional investment is of a kind that would be of benefit to Solomon Islands, it may recommend to the Commissioner of Inland Revenue and the Comptroller of Customs and Excise, as the case may require, to grant the approved enterprise further tax exemptions not exceeding a period of five years, and other incentives it may qualify for in terms of the investment.”

The Issue

The issue for determination before this Court arises from an amendment in 1998 to section 14 of the Income Tax Act. Prior to the amendment, section 14 relevantly provided:

“Notwithstanding the provisions of sections 34, 36, 37, 38 and the Sixth Schedule –

(a)	no withholding tax shall be payable on any dividend paid to any shareholder of any approved enterprise on accumulated profits during the period of the tax exemption and a further period of five years thereafter, provided that the total amount of dividends paid to such shareholders do not exceed the investment; and 

(b)	the interest paid by an approved in respect of any money borrowed from a financial institution and employed in the production of income and profits shall not be liable to tax during the period of the tax exemption.”

By the Income Tax (Amendment) Act 1998 (No. 2 of 1998) [hereinafter referred to as “the 1998 Amendment”], section 14(a) was amended by the insertion of two words “if applicable” so that section 14(a) now read:

“(a) no withholding tax shall be payable on any dividend paid to any shareholder of any approved enterprise on accumulated profits during the period of the tax exemption and further period of five years thereafter, if applicable, provided that the total amount of dividends paid to such shareholders do not exceed the investment;” (emphasis added)

The bone of contention arises from the differing views on the construction to be applied to those words “if applicable”.

The argument of the Commissioner

The Commissioner contends that the 1998 Amendment took away any automatic exemption of a further period of five years after the original period of tax exemption had transpired. In lieu thereof the amendment was intended to correspond to any further tax exemption period not exceeding five years granted under section 10(3). Unless there was any further tax exemption for a period not exceeding five years granted under section 10(3), no withholding tax exemptions may be granted for a further period of five years under section 14(a).

The argument of Solbrew

Solbrew on the other hand contends that the 1998 Amendment should rather be construed as an attempt to make it clear that the dividend withholding tax exemption of a further period of five years is only available where there is an applicable tax exemption in the first place. In other words, the entitlement to a further period of five years free of withholding tax payments remains unaffected by the 1998 Amendment.

Consideration of the submissions of the Parties

(i) Ambiguity in the pre-1998 provision: The first objection raised by Mr. Sullivan for Solbrew was that the present amendment was an attempt to clarify the position out of an abundance of caution. Having said that learned Counsel concedes that although the pre-1998 position was in fact unambiguous, a layman might have been confused about it. Learned Counsel cites a number of case authorities in support of his contention. The first case cited is Re Samuel per Vt Haldane LC:

“It is not a conclusive argument as the construction of an earlier Act to say that unless it be construed in a particular way a later enactment would be surplusage. The later Act may have been designed, ex abundante cautela, to remove possible doubts.”

The second case relied on was Thompson v. J.T. Fossey Pty. Ltd (No. 1) per judgment of Franki J.:

“I think a court should be careful not to assume that the legislature has not amended the Act for the purpose of clarifying it in the eyes of the layman.”

What was common in those statements were the references to the existence of possible doubts, confusion or ambiguity in the legislation sought to be amended. It was for those reasons that the amending legislation was enacted, to remove any possible doubts or clarify the position in law. In the circumstances of this case, the submissions of Mr. Sullivan raises the presumption of the existence of some doubt, confusion or ambiguity in the pre-1998 provision. Unfortunately I am unable to find the existence of any such doubt, confusion or ambiguity which warranted removal or clarification. The pre-1998 position was crystal clear. No withholding tax was payable on any dividend paid to any shareholder of an approved enterprise on accumulated profits during the period of the tax exemption plus a further period of five years thereafter. I am unable to accept the submission that a layman might be confused about this tax incentive and its application.

(ii) The second objection raised was that a parliamentary intention to take away an existing tax benefit or exemption should not be inferred without express words. Where there is any doubt, exemptions are to be construed in favour of those who claim them – Armytage v. Wilkinson, Burt v. FCT, Canwan Coals Pty Ltd v. Commissioner of Taxation. Learned Counsel points out that this was but a particular application of the dictum, that the subject is taxable only by the plain words of the statute and not by analogy or inference – IRC v. Duke of Westminster. Mr. Sullivan submits that if Parliament had intended to take away the additional five years benefit it would simply have deleted the words “and a further five years thereafter” – that would have had the clear effect of depriving the approved enterprise of that benefit. With such an amendment, if the enterprise had a tax exemption under section 10(3), it would still have been entitled to the benefit of section 14(a), but only during the period of that exemption.

The first point to note about this submission is that it presumes that the 1998 Amendment did not use plain and clear words and that one had to draw an inference to make any sense out of what its stated intention was. Unfortunately, that is not correct. The effect or stated intention of the 1998 Amendment is fairly simple and easy to comprehend. A further period of five years which used to follow the period of the tax exemption was now being made conditional upon any further tax exemptions granted under section 10(3) of the Income Tax Act. The only benefit removed by the use of the words “if applicable” was the automatic granting of a further period of five years under the pre-1998 provision, after the original period of tax exemption had lapsed. The tax exemption in respect of withholding tax was now made dependent upon any further tax exemptions for a period not exceeding five years under section 10(3).

(iii) The third objection raised was that the effect of the 1998 Amendment was to alter the meaning of the words “the tax exemption”. Mr. Sullivan submits that whereas under the pre-1998 amendment those words could only have applied to the initial tax exemption and not to a tax exemption granted under section 10(3), the 1998 Amendment now had the effect of equating the further period of five years thereafter to section 10(3). Learned Counsel submits that one would expect such a dramatic change to be effected by an express amendment.

Whilst conceding that the words “tax exemption” under the pre-1998 legislation could only have applied to the original tax exemption, any suggestions that the addition of the words “if applicable” might have altered their meaning is misguided. Their meaning remained the same before and after the amendment; they both applied to the initial tax exemption. What had changed was that whereas under the pre-1998 legislation, a further period of five years of withholding tax exemption would have applied irrespective of whether a further tax exemption was granted under section 10(3), under the 1998 Amendment, it was now dependent upon the granting of a further tax exemption period under section 10(3). In the absence of any further tax exemption periods being granted under section 10(3), no corresponding withholding tax exemptions would be available.

(iv) Learned Counsel submits that if the construction propounded by the Commissioner of the 1998 Amendment were applied, it would adversely affect the meaning of the phrase “the tax exemption” in section 14(b) of the Income Tax Act. Either it is also impliedly amended so as to be that limited to the period of the first exemption consistent with the suggested meaning in s.14(a) or “the tax exemption” in s. 14(a) now means something quite different from the same phrase in s. 14(b).

The submission of learned Counsel Sullivan assumes that the definition of the phrase “period of the tax exemption” in section 14(a) was rendered ambiguous by the 1998 Amendment and hence in turn affecting the use of the same phrase in section 14(b). Unfortunately, this couldn’t be further from the truth. The 1998 Amendment did not change or alter the meaning of that phrase in section 14(a) and therefore had no effect on section 14(b) either. This submission has been misconceived.

(v) Mr. Sullivan contends that the 1998 Amendment would have the effect of reducing the effective period of the tax exemption by at least one year on the grounds that the payment of dividends free of withholding tax is limited to payments out of accumulated profits (i.e. payments out of current year profits do not qualify). Since the profits from the final year of any period of the tax exemption must necessarily be current, this means that the investor gets one year less withholding tax exemption than the income tax exemption. Learned Counsel submits that this cannot have been the intention of the 1998 Amendment.

Respectfully such a submission is too simplistic and overlooks the simple definition of the words “accumulated profits”. The words “accumulated profits” refers to undivided profits that had been accumulated over a period of time. To suggest that the current year profits cannot be included in the calculation of the accumulated profits is not only nonsensical but is reading words into the statute which do not exist. The phrase should be construed inclusive of the current year. So for instance, if it is over a period of two years then it should commence at the beginning of year one and completed at the end of year two. If it is over a period of five years, it commences at the beginning of year one and ends at the end of year five, not year four. Nowhere in section 14(a) does it say that payments out of current year profits do not qualify or should be excluded. A five year period does not end at year four; it ends at the end of year five! Profits accumulated after the completion of year five belong to the new year or the sixth year. The submission that the 1998 Amendment would have the effect of reducing the effective period by at least one year therefore must be rejected. If valid, the very same argument should have been applied to the pre-1998 legislation. That was not done and so I cannot see how this construction should now be applied only to the 1998 Amendment. Solbrew cannot be permitted to approbate and reprobate.

(vi) Mr. Sullivan contends that to read the 1998 amendment in the manner suggested by the Commissioner would be to read down the incentives and in large measure destroy the beneficent intent of Part III generally and section 14 in particular. Learned Counsel submits that for this to occur, there would need to be a clear Parliamentary intention, which is missing.

Unfortunately I must disagree with learned Counsel’s submissions. His submission assumes that a clear Parliamentary intention is missing. That couldn’t be further from the truth.

Parliamentary intention

It is crucial in this case that Parliament’s intention in respect of the 1998 Amendment is determined where possible. The most common way of determining Parliament’s intention is by looking at the words of the Act. Where there is ambiguity, sometimes a consideration of the enacting history, which includes Hansard Reports may assist to clarify what that intention was.

There is no law which restricts judicial use of Hansard Reports. In a reported speech, Lord Hailsham LC said:

“I always look at Hansard, I always look at the Blue Books, I always look at everything I can in order to see what is meant … The idea that [the Law Lords] do not read these things is quite rubbish…”

Lord Denning in Hadmor Productions Ltd v. Hamilton confirmed such view:

“Having sat there for five years, I would only say: I entirely agree and have nothing to add”. 

In Govindan Sellappah Nayar Kodakan Pillai v. Punchi Banda Mundanyake the court said:

“… judicial notice ought to be taken of such matters as the reports of Parliamentary Commissions and of such other facts as must be assumed to have been within the contemplation of the legislature when the Acts in question were passed.”

In Hadmor Productions Ltd v. Hamilton (ibid) Lord Denning made specific reference to this matter:

“In most of the cases in the courts, it is undesirable for the Bar to cite Hansard or for the judges to read it. But in cases of extreme difficulty, I have often dared to do my own research. I have read Hansard just as if I had been present in the House during a debate on the Bill. And I am not the only one to do so.”

I have taken the liberty in this instance to have a peek at the Hansard Report on this amendment. I do so, on the principle of judicial notice enunciated above, that a court or other adjudicating authority will in certain circumstances accept the existence of a law or fact relevant to the interpretation of an enactment without the necessity of proof.

The Hansard Report records that on Tuesday 14th April 1998, the Hon. Sogavare spoke on the 1998 Amendment as follows:

“The reference to a further five years tax holiday in section 11(f) [section 14(a) is the corresponding provision under the Revised Edition 1996] refers to a ‘period not exceeding five years’ as mentioned in section 11(b)(3) [section 10(3) corresponding provision under the Revised Edition 1996]. It is important therefore that we qualify before the period of five years, as it would be relevant only if that section applies. This is achieved through the addition of the words ‘if applicable’ in the suggested amendment.”

When the Hansard Report is considered, no confusion, uncertainty or doubt is left in the mind of this court as to the Parliamentary intention for the 1998 Amendment. It was obvious from the Hansard Report that the amendment was facilitated so that any further period of five years of tax exemptions for withholding tax was to correspond to any further tax exemptions for a period not exceeding five years granted under section 10(3) of the Income Tax Act. Unless a further tax exemption is granted under section 10(3), no further period of five years withholding tax exemptions can be claimed under section 14(a). Whereas under the pre-1998 provision a further period of five years automatically followed the original period of tax exemption, that was no longer the case under the 1998 Amendment, which was now made conditional on any further tax exemptions granted under section 10(3) of the Income Tax Act.

Decision

The declarations sought under the Originating Summons of the Applicant filed 5th May 2003 can now be answered as follows. (1) The proper commencement date of the Tax Holiday referred to in clause 2.1 of the Memorandum of Understanding dated 22 November 1989 between the Applicant and Solomon 

Islands Government and incorporated in the Applicant’s foreign investment Certificate of Approval is 1 April, 1993. (2) No withholding tax exemptions for a further period of five years can be claimed by the Applicant after 1st April 2001. Having conceded that no further tax exemption for a period not exceeding five years was granted under section 10(3) to the Applicant, the Applicant’s right to claim for a further period of five years for withholding tax exemptions must necessarily fail.

Orders of the Court:

(1) Grant declaration that the proper commencement date of the Tax Holiday referred to in clause 2.1 of the Memorandum of Understanding dated 22 November 1989 between the Applicant and Solomon Islands Government and incorporated in the Applicant’s foreign investment Certificate of Approval is 1 April, 1993. 

(2) Refuse declaration sought, that the Applicant is entitled under section 14(a) of the Income Tax Act (cap. 123) to pay dividends to shareholders free of withholding tax during the period 1 April 2001 to 31 March 2006. The Applicant is not entitled to claim for such withholding tax exemptions it being conceded that no further tax exemptions for a period not exceeding five years was granted under section 10(3) of the Income Tax Act.

(3) The Applicant shall bear the costs of the Respondent in this application.

The Court.