FACTS - On 27th April 1999 Carreras Group Limited (Carreras) entered into a written agreement to transfer all the issued ordinary share capital and most of the preference shares in Jamaica Biscuit Company Limited ("Jamaica Biscuit") to Caribbean Brands Limited ("Caribbean"). The consideration was expressed to be a debenture to be issued by Caribbean in the sum of U.S $37.7 Million and in terms annexed to the agreement. The terms were that the debenture would not be either secured or transferable. The principal debt would carry no interest and be repayable by bankers' cheque on 7th May 1999.

In the event the debenture was not redeemed until 11th May 1999 when Caribbean paid US $19.9 Million and JA $700,344.14 and Carreras accepted these payments in full settlement.1

Carreras contended that the transaction was a reorganization of share capital pursuant to paragraphs 4 and 6 of the First Schedule to the Transfer Tax Act and therefore not subject to transfer tax.

The Stamp Commissioner (now Commissioner of Taxpayer Audit and Assessment Department) assessed the transaction on the basis that it was a disposal of the shares and not a reorganization. Carreras paid the tax under protest and filed an appeal to the Revenue Court.

The result of that appeal heard by Justice Anderson was not in favour of the Revenue as it was held that the transaction was exempt from tax. The Commissioner appealed to the Court of Appeal which ruled that the transaction was not exempt. The matter was then appealed to the Privy Council by Carreras and the appeal was dismissed.

1. Privy Council Appeal No.24 of 2003

LAW - The relevant law and some cases applied are outlined below:

1. STATUE

Part I of the First Schedule contains "special provisions with reference to shares and to debentures". Two of these are relevant: paragraphs 4 and 6. Paragraph 4 deals with "reorganization of share capital". The relevant words are:

"4.-(1) This paragraph shall apply in relation to any reorganization of a company's share capital; and for the purposes of this paragraph…

(a) reference to reorganization of a company's share capital include…(i) any case where persons are… allotted…debentures of the company in respect of and in proportion to (or as nearly as may be in proportion to)…their holdings of shares in the company….

(b) 'original shares" means shares held before and concerned in the reorganization… of capital, and 'new holding' means, in relation to any original shares, the ….debentures of the company which as a result of the reorganization…represent the original shares…

(2) …a reorganization…of a company's share capital shall not be treated as involving any disposal of the original shares.

Paragraph 4 thus deals with (among other things) an exchange of shares for debentures in the same company. Paragraph 6(1) extends this to an exchange of shares in one company for debentures in another:

"…where a company issues…debentures to a person in exchange for shares in …another company, paragraph 4 shall apply with any necessary adaptations as if the two companies were one company and the exchange were a reorganization of its share capital." 2

2. CASES

In addition to the statutory provisions, a number of cases were considered by all the courts in arriving at a decision. Salient among these was the case of W.I. Ramsay v. IRC (Ramsay) [1981] 1 ALL ER.865. The decision in Ramsay has been dubbed the modern approach to the interpretation of taxing statutes. The principles of Ramsay were summarised in another case Craven v. White [1988] 3 ALL ER 495 as follows:

2. Summary of statutory provisions extracted from Privy Council Appeal No. 24 of 2003

"…the court must first construe the relevant enactment in order to ascertain its meaning; it must then analyse the series of transactions in question, regarded as a whole, so as to ascertain its true effect in law; and finally it must apply the enactment as construed to the true effect of the series of transactions and so decide whether or not the enactment was intended to cover it. The most important feature of the principle is that the series of transactions is to be regarded as a whole. In ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps in it were contractually agreed in advance or had been determined on in advance by a guiding will which was in a position, for all practical purposes, to secure that all of them were carried through to completion. It is also relevant to take into account, if it be the case, that one or more of the steps was introduced into the series with no business purpose other than the avoidance of tax."

All the cases are consistent in the fact that where there is a preordained series of transactions to achieve a commercial result and an intermediary step has been inserted which has no business purpose other than the avoidance of tax, then the transaction would not be free from tax liability.

PRIVY COUNCIL JUDGEMENT

The Privy Council in its judgement delivered on April 1, 2004 ruled in favour of the Commissioner.

The Privy Council adopted a wide view of the transaction, assessing it as a whole and applying the modern approach to interpreting tax statutes quoting Ramsay and others. They opined that if the transaction was confined to what happened on 27th April by virtue of the agreement executed on that day there could be no doubt that it fell within the description in the statute. However, a wider view of the terms of the debenture and its redemption two weeks later led to the conclusion that this was one (1) transaction. The debenture was only a formal step having no commercial purpose or significance in a transaction by which shares in Jamaica Biscuit were exchanged for money.

Their Lordships concluded that it was plain from the terms of the debenture and the time table, that the redemption was not merely contemplated " but intended by the parties as an integral part of the transaction, separated from the exchange by as short a time as was thought to be decent in the circumstances. The absence of security and interest reinforces this inference."3 The exchange and redemption of the debentures were plainly a single transaction and fell to be taxed as such.

3. Privy Council Appeal No. 24 of 2003.

CONCLUSION

1. The judgment of the Privy Council is seminal to the approach in interpreting local taxing statutes and also for administration of taxes. From a tax administration perspective, the Commissioner should be emboldened in her fact-finding mandate in assessing similar avoidance schemes.

2. From a legal standpoint, the courts should similarly be fortified in adjudicating on these matters. However, careful note should be made of the caution sounded by the Privy Council. They warn that there may be cases in which the facts do not justify a similar conclusion as in this case. This precedent by which our judges are bound should therefore be used advisedly. They recommend that the remarks of Justice Anderson be considered, that is, legislative scrutiny of the Transfer Tax Act, and in particular the wisdom of applying capital gains provision for the purposes of transfer tax.

The relevant provisions of the Transfer Tax Act are similar to the provisions of United Kingdom Finance Act 1965. However, the United Kingdom statute concerns capital gains tax while ours is concerned with transfer tax. Under the United Kingdom statute the result of a similar matter may have been different. Indeed similar cases coming before our revenue administration and the courts may result in tax being avoided, and one way add, in cases where it should not be so. The recommended solution as urged by Justice Anderson and the Privy Council is amendments to the Transfer Tax Act.