Law Amended to Capture Corporate Tax Evaders

Scotia bank had challenged the request by Government to pay corporate tax
Scotiabank legally challenged the request by Government to pay corporate tax

An amendment to Grenada’s Income Tax law on Friday provides for companies or corporate bodies with branches in Grenada to declare their net profit from its Grenada operations and pay corporate tax on the profit to the island’s tax collection department.

Economic Affairs Minister Oliver Joseph said that it has become a traditional practice of companies with branches in Grenada to transfer the profits of operation to the parent company in another jurisdiction and pay very little or no corporate tax under the disguise that its local operations is not profitable.

“This has been happening for years and some of them will establish accounts in low tax jurisdiction and pay very little and while the location where the profits are actually made receives nothing,” Joseph said in his contribution to the Bill which was presented to the House of Representatives by Prime Minister Dr Keith Mitchell, who is also the Finance Minister.

The amendment came about as a result of legal action taken by the Grenada branch of an international bank operation in Grenada. Though Government lost the matter and will have to pay legal cost and other fees, the judgment provided an opportunity for Government to approve the necessary legal measures to ensure that the loop hole used by the Banking institution and other corporate bodies is eliminated.

The matter started in 2001 and the Privy Council judgment was delivered on 9 July, 2013. The London based Privy Council which is presently the final appellate Court for Grenada, upheld the Court of Appeal’s ruling in favour of the Bank of Nova Scotia.

The Bank had challenged the Comptroller of inland Revenue who insisted that withholding tax was payable on reimbursable head-office expenses pursuant to Section 50(1) of the Income Tax Act notwithstanding that it was accepted that these sums were not in the nature of income.

The leading judgment in the Court of Appeal was delivered by Mitchell JA where he held that:

1.            A branch of a bank (in this case) had to be a separate person within the meaning of Section 50. He found that a branch could not be such a separate juridical person and the effect was that there could not be a payment by “a person” to another person.

2.            The payments had to be in the nature of income. The Privy Council agreed with Mitchell JA on the first point but, while not overruling him on the second point, left the matter open. The upshot is that the entire judgment of the Court of appeal stands.

It is to be noted that the Privy Council was clear that the practice, in this case, of a head office meeting certain group costs and being reimbursed by a branch office, did not suggest tax evasion or avoidance. It is submitted that the practice is above board.

It is believed by some that this decision has far reaching implications for multi-nationals doing business in the Caribbean as most territories have similar legislation and the potential tax liabilities could run into the millions.

The Bank was represented by Dr. Claude Denbow SC and James Bristol. The Bank’s Grenada solicitors are Henry, Henry & Bristol who instructed in the Grenada proceedings.

Prime Minister Mitchell said that the amendment will now require that all companies with branches in Grenad  to pay the 30% corporate tax on net profit. The law will have to receive the approval of the Upper House and the consent of the Governor General for it to be enforced in 2014.

By Linda Straker

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